No single crypto exchange can be perfect for everyone. It is important to evaluate your own interests and find an exchange that aligns with your goals. We hope this article will help you do just that.
What is a crypto exchange?
A crypto exchange is an online business that helps customers exchange crypto and other digital assets with alternatives like fiat currency. Customers can use fiat currency like the US dollar or the Indian rupee to buy crypto for investment or trading on these exchanges. Exchanges can also be used to convert one crypto to another—for example, Bitcoin to Litecoin.
Read more about them here.
Why are crypto exchanges important?
If you invest in the stock market, you’re probably familiar with the concept of brokers—either online or offline. Crypto exchanges are similar to these brokers. They give you access to the tools you need to buy and sell cryptocurrencies. They also offer security features that help keep your transactions safe and storage options to keep your investments ready to hand.
In a world where crypto is slowly gaining traction, exchanges have an important enabling role to play. In most cases, exchanges offer primary exposure to new adopters, allowing them to understand how coins interact in the market, track prices, and make their first investments. The more efficient exchanges are, the more people overcome entry barriers and begin their journey in crypto.
How do crypto exchanges work?
Exchanges are essentially businesses—technically, service providers. They are middlemen that facilitate the exchange of cryptocurrencies and fiat. Crypto exchanges list coins and tokens on their platform to make them available for trade to consumers. Then, they integrate various trading options and order types—market orders, limit orders, etc.—to help consumers interact with the asset. Tools like charts and indicators are also embedded quite often. Here are the kinds of things they facilitate.
Primarily, crypto exchanges work in the direct selling space. They sell cryptocurrencies to investors in exchange for fiat money. Some exchanges also allow using credit cards, wire transfers, and other forms of payments for assets. Exchanges generally credit the assets to users’ on-exchange wallets. After this, these coins can be moved to an external wallet, traded on the same exchange, or sold to the market for a profit or loss.
Trading is the act of speculating crypto price movements in the short term and buying or selling coins accordingly to turn profits. Crypto exchanges help people not only trade crypto but do it well. They do the latter by offering access to tools like charts, predefined algorithms, and other embedded software that simplify prediction.
Options trading and futures trading are some ways to trade on an exchange. The choices available depend on the exchange to some extent.
Since exchanges sell crypto, they also provide users with a wallet to store them. Cryptocurrencies can sometimes be withdrawn from the exchange wallet to an external one. Some traders choose exchanges that allow this due to ease-of-trading considerations or security reasons. Exchanges usually charge a fee for crypto storage as part of their commissions.
Some exchanges—decentralized exchanges in particular—facilitate crypto lending through their DeFi protocols. UniSwap users, for instance, can deposit their coins in pairs to add liquidity to the exchange. In return, the users are given small rewards for doing so. Exchanges usually benefit from such added liquidity.
How do crypto exchanges turn a profit?
Just like any other business, crypto exchanges, too, need to turn profits to remain functional. Here are a few ways in which they make money.
Many crypto exchanges make money via trading fees. This is the fee that customers pay each time they buy or sell something. These cuts vary depending on how big the trades are and the trader’s monthly volumes. Most centralized exchanges charge anywhere between 0–1.5% per trade. This means for a ₹1,000 trade, you can expect to pay anything between ₹0 to ₹15 per trade to the exchange.
Listing fees refer to the money an exchange earns for listing a new project or coin. This information is usually not made public.
Market making is the process of providing liquidity to popular coins. Since high liquidity is often associated with favorable market conditions, market making helps create a conducive investment environment for trading. Since the value of the coin purchased may fluctuate before it’s sold to a buyer, market makers are incentivized for the risk involved in holding it. Exchanges often act as market makers, buying cryptos at a discount when no one wants to. By doing so, they earn certain incentives and may even charge a spread fee.
Types of crypto exchanges
There are broadly two types of cryptocurrency exchanges. While both of them essentially have the same functions, they differ principally in operation.
1. Centralized exchanges
Centralized exchanges are those that use a third party to monitor and secure buyer and seller transactions. This transactional data is stored on centralized servers. For security reasons, centralized exchanges often require customers to verify personal information to access the platform.
2. Decentralized exchanges
Decentralized exchanges, also known as DEXs, are similar to centralized ones but are free from third parties. They rely on blockchains completely for storing funds and recording transaction history. Peer-to-Peer or P2P trading is possible thanks to decentralized exchanges.
How to choose a crypto exchange
With many options available, choosing an exchange can be daunting. However, since this is an important part of the investing process, here are some pointers to keep in mind to choose the right one.
Examine the security and safety features
Due to the large volume of funds stored on exchanges, they are primary targets for most crypto scams and attacks. Always check if your exchange has sufficient protections and is equipped to prevent and counter hacks. It is also important for the exchange to have a fund recovery plan or insurance policy in case of a breach.
Check the number of coins available for trading
More is always better in relation to the number of coins available for trading. The more choices you have, the more diversified your portfolio can be.
Look into the platform’s support for fiat currencies
There are a number of ways in which your exchange can accept fiat currency. Internet banking, UPI, and debit or credit cards are some popular options most exchanges offer. Ensure that your preferred method of payment is not only available and functional but also safe. Of course, you will also have to check if the platform supports the fiat currency you use—Indian rupee, US dollar, or whatever else.
Make sure you’re aware of all fees
Exchanges are notorious for hiding their fees from customers to attract more business. Keeping track of trading fees, maker fees, taker fees, and other hidden charges and cesses is important. While you do not want to be paying an exorbitant fee, keep in mind that free exchanges may not always have the best security or features.
Ensure regulation compliance
Cryptocurrencies are an unregulated asset in India – both in terms of trading and conduct of crypto businesses. Do your research and determine if your exchange follows security and regulatory guidelines laid out by experts to avoid any future hassles with your funds.
Look for insurance cover
As mentioned earlier, exchanges store a lot of money. So it is important for them to have an insurance policy in place to protect them in the event of a hack. It’s a good idea, therefore, to make sure you look into this too while choosing an exchange.
Let the rewards motivate you
Some exchanges will also have referral programs. Such programs incentivize users to bring in more business or trade a fixed number of times each month. The rewards may be in the form of fiat money or coins. So you could also factor this in, while picking an exchange.
Choosing a crypto exchange does not have to be incredibly difficult. As long as you know the basics and keep these pointers in mind, you should be good to go. Happy trading!
1. Which is the best exchange for cryptocurrency trading?
The best exchange for each person is different. An exchange that suits your needs may not work for someone else. So the key to identifying the best exchange for you is to figure out what you want. With so many options out there these days, you are sure to find something that is a good fit for you.
2. Which crypto exchange is good for beginners?
CoinSwitch is a good exchange for beginners. It is safe and secure and makes investing easy and accessible for everyone. Investing in your first coin is not only super simple but also cheap, with minimum investments starting at just ₹100!
3. How do I choose the right exchange?
Start by determining which exchanges have the best security standards, follow existing regulations, and have insurance in place. Next, filter out the ones that have fees you cannot afford. In the end, choose the one that lets you invest in the coins you want through the payment methods you prefer. For more information, read our blog post above.