You may have heard of a lot of new websites springing up recently which are being referred to as ‘Cryptocurrency Exchanges’. You might have heard of Coinbase, Binance or Bitfinex, but what exactly are they?
This article aims to give a quick background and bit of insight into what a cryptocurrency exchange is. We take a look at why they exist, and which ones you might want to investigate and use yourself.
What is a cryptocurrency exchange platform?
First of all, it’s worth taking a step back, yes we’re here to talk about cryptocurrency exchanges, but let’s remind ourselves of what other ‘exchanges’ we might already be familiar with.
An ‘exchange’ is typically a location for two parties to meet and trade. A ‘seller’ comes to an exchange with certain ‘goods’ which they want to sell. A ‘buyer’ will then interact with them, enquire about those goods and then attempt to buy them. The ‘exchange’ itself could be a physical marketplace like a market stall, or an online website.
Exchanges have been around for centuries and history is littered with exchange marketplaces as we’ve developed, expanded, and built economies. A simply marketplace might be a fish or meat market, or a –‘flea-market’ where you can buy and sell small trinkets, clothing and the like. As commodities have become more sophisticated, new exchange markets have developed. Over time we have seen exchanges for the trade of precious metals, gold and silver, foreign currencies, and now cryptocurrencies.
More recently, we have the now familiar stock and currency exchanges. Obvious examples are the New York Stock Exchange or the London Stock Exchange. At both exchanges, huge sums of money change hands very rapidly as stocks, shares, bonds and foreign currencies are all traded.
As technology has advanced, and new goods or commodities have arrived on the scene, people need a place to market and trade these items. With the arrival of Cryptocurrencies then, it’s only natural that our newest form of exchange is the cryptocurrency exchange.
What exactly is a Cryptocurrency Exchange?
A cryptocurrency exchange is a platform which enables users to trade in Cryptocurrencies – digital assets such as Bitcoin, or alternative coins (Altcoins) including Ethereum, Litecoin and Ripple.
Most cryptocurrency platforms facilitate the purchase of cryptocurrency using the customers native ‘fiat’ currency. That is, their traditional unit of currency such as $USD, €EUR or £GBP. Customers can use a cryptocurrency exchange to buy a certain amount of their desired cryptocurrency, in exchange for a set price in their chosen fiat currency.
In a few cases – some cryptocurrency exchanges only deal in crypto-crypto pairings, so to ‘buy-into’ the market in the first place, users will have to convert their fiat money elsewhere, using a different exchange or method.
Cryptocurrency exchanges play a vital role in the crypto economy, offering both amateur and professional investors the tools and access to market to enable quick and easy trading. These exchanges bring together thousands of buyers and sellers in one place – quickly matching orders and executing trades. They do this for a small fee, or transaction commission of course, but their service is highly valuable and very similar in nature to that of a traditional stock or foreign currency exchange.
Put simply – a cryptocurrency exchange acts as the middle-ground and interface between buyers, sellers, investors and merchants in the crypto space.
Different types of Cryptocurrency Exchange
Currently, there are a few different types of cryptocurrency exchange. Some exchanges work solely on the task of connecting buyers with sellers, on a P2P or “peer-to-peer” basis. They might typically process these transactions through Bank Transfers, Credit or Debit Card payments, International Bank Transfer (SWIFT or SEPA for example), liquid cash, or 3rd party merchants such as PayPal. These platforms are the simplest, and offer a consumer-grade product similar in nature to eBay or Amazon.
Essentially what they do is allow customers to buy Cryptocurrencies direct from the market, at market prices. This is the simplest form of transaction, but it can also be the most expensive – taking the ‘going-rate’ at whatever the current market asking price is. Coinbase is a good example of this option.
Elsewhere, we have the popular ‘trading platform’, examples of which include Coinbase Pro, Cex.io, or Binance.
How Cryptocurrency Exchanges work
Cryptocurrency trading platforms are very similar in nature and interface to their more traditional cousins in the stock or fiat foreign exchange markets. They require a greater degree of skill and knowledge of trading tools (which comes with a bit of a learning curve), but offer a greater range of options, and almost always abetter price.
Trading platforms allow buyers to set their own ‘Bid’ – the price at which they want to buy a certain cryptocurrency. If the trading exchange manages to find and match them with a seller willing to accept that Bid, the trade will execute and they will be acquire the cryptocurrency. This often happens at a somewhat better rate that the current average market price, but can also take longer to make the transaction.
On the other side of the trade, the exchange platform allows sellers to set their ‘Ask’ – the asking price which they are asking for, for their amount of cryptocurrency.
Traders can nominate their Bid or Ask prices at various points, and as the market moves, their trades will be matched and execute. This can all happen very quickly, or may take some time for orders to be ‘filled’. Either way – this method is often more favourable to experience investors and incurs less fees than buying or selling direct at the going market rate.
Which are the best Cryptocurrency Exchanges worth using to trade your cryptocurrency?
There are a lot of different cryptocurrency exchanges out there to try. They can vary quite significantly in terms of trade volume (how much liquidity, or cash is available to trade in their markets). Cryptocurrency Exchanges can also vary in security, reputation, and transaction fees. The range of cryptocurrency and fiat currency pairs available to trade will also vary between exchanges.
Some of the things to consider when weighing-up the different options with cryptocurrency exchanges:
Can I buy-in with my preferred / native fiat currency? Most exchanges support $USD or €EUR, however many are regional, and not all offer support for deposits in #GBP for example.
What are the fees for depositing fiat currency into each exchange? Some offer free deposits, others will take a small percentage, which might be different based on your payment method. Credit Card payments will usually be more expensive than International Bank Transfers for example.
Can I buy the cryptocurrency or Altcoin that I want? Not all cryptocurrency exchanges carry / support all coins and tokens. As time goes on, each exchange expands its offering and the number of Altcoins it supports. However, if you’re wanting to trade a particularly rare coin, best check to see where it is available.
Is there enough trading volume in the cryptocurrency I want to trade? Trading volume and liquidity are vital. Many exchanges are simply too small and don’t have large enough pools of buyers and sellers to make your trades quickly. You could find that your order goes unfilled for a long time if there aren’t enough buyers / sellers on a particular platform.
Cryptocurrency exchanges are still in their relative infancy and liquidity is a big issue. Fantastic new products such as Quoine’s Liquid platform and World Book will soon solve this.
Our 5 Recommended Cryptocurrency Exchanges
With all of that considered, our 5 recommended cryptocurrency exchanges are as follows:
(Based on balance of ease of use, fees, range of currency pairs available, and largest trade volumes and liquidity)
- Binance – One of the biggest and most popular exchanges in the market. Well funded and backed by venture capital. With an excellent founding team and consumer-grade product and services, currently ranked second in the world by daily trade volumes.
- Coinbase & Coinbase Pro – Arguably THE most consumer friendly, and favourite for North American and European customers. Offers support for purchases and deposits in $USD, £GBP and €EUR. Probably the easiest exchange product to use. Coinbase is very well designed, and backed by very reputable venture capital firms. Consistently in the global top 10 for daily trading volumes. Probably the most professional and best organised outfit in town.
- CEX.io – A London (UK) based cryptocurrency exchange. Easy access for £GBP and €EUR customers. CEX.io also has a growing user base and strong daily trade volumes.
- Huobi – A very fast growing crypto exchange, very popular in far east Asia. Huobi also has its own cryptocurrency token called Huobi Token (HT), which is performing very well.
- Liquid – A Japan based fiat-crypto exchange. Also one of the only and best places to acquire QASH. Liquid also offers the unique ICO Mission Control – a brilliant new platform for participating in trusted ICO sales.