What is a cryptocurrency exchange?

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A cryptocurrency exchange is an online platform that enables you to trade cryptoassets. Through these platforms, you can buy and sell cryptoassets such as Bitcoin, Ethereum, XRP, and Dogecoin. In this guide we have ranked and reviewed some of the largest cryptocurrency exchanges.

Cryptocurrency exchange explained:

There are many different cryptocurrency exchanges in operation today and there’s no one exchange that’s best for everyone. When choosing a crypto exchange, there are a number of things to consider including the range of cryptoassets offered by each platform, fees, security features, educational features, and regulation. The best crypto exchanges make it easy to buy and sell the cryptocurrencies you’re interested in with low fees and a high level of security.

How does a cryptocurrency exchange work?

Cryptocurrency exchanges operate in a similar way to stock brokerage platforms,  however, instead of matching buyers and sellers of stocks, they match buyers and sellers of cryptoassets.

Most crypto exchanges use an order book to match buy and sell orders. An order book is a list of all outstanding buy and sell orders, organised by price level. When a buyer is matched with a seller, the exchange executes the trade.

Some crypto exchanges allow you to trade one cryptoasset for another. These are known as crypto-to-crypto exchanges. Others, however, only allow you to trade fiat currencies such as the US dollar or the British pound for cryptoassets. These are known as fiat-to-crypto exchanges.

What are the most popular cryptocurrency exchanges?

Some of the most popular crypto exchanges in the UK include:

  • Coinbase is a US-based cryptocurrency exchange that was founded in 2012. It currently has 73 million verified users and around 7.4 million active users. Its customers include retail investors, institutional investors, and ecosystem partners. At present, there are over 100 different cryptoassets on the Coinbase platform.
  • Crypto.com. Crypto.com is a Singapore-headquartered crypto exchange that was founded in 2016. It currently has around 10 million users. Through the crypto.com platform, users can trade 200+ cryptocurrencies with 20+ fiat currencies using bank transfers or credit/debit cards.
  • Kraken is a US-based crypto exchange that has around 6 million users. Founded in 2011, it is one of the oldest crypto exchanges in the world. At present, Kraken offers access to 50+ cryptoassets.
  • eToro is a multi-asset brokerage company that offers access to crypto, stocks, ETFs, forex, and more. It currently has over 23 million users on its platform. On eToro, users can buy and sell over 20 cryptoassets including Bitcoin, Ethereum, and XRP.

What are the different types of crypto exchanges?

There are two main types of cryptocurrency exchanges – centralised exchanges and decentralised exchanges.

A centralised exchange is managed by a corporate authority and is custodial in nature. Most popular crypto exchanges such as Coinbase, are centralised.

By contrast, a decentralised exchange distributes verification powers to anyone willing to join a network and certify transactions. These exchanges allow users to execute peer-to-peer transactions without the need for a third party.

Both centralised and decentralised exchanges have their advantages and disadvantages.

One major advantage of centralised exchanges is that they tend to be quite user-friendly. Most centralised exchanges provide easy-to-use websites and apps that make crypto trading quite straightforward. Another advantage is that they tend to be quite reliable.

On the downside, centralised crypto exchanges tend to charge relatively high transaction fees. Coinbase, for example, charges transaction fees of around 0.50% to buy cryptoassets such as Bitcoin and Ethereum (3.99% for credit card purchases). Centralised crypto exchanges are also often targeted by hackers and cybercriminals due to the fact they hold a lot of crypto on behalf of their customers. In 2014, one of the largest centralised crypto exchanges, Mt. Gox, suffered a major hack in which $460 million in customer funds was stolen.

One advantage of decentralised exchanges is that they offer anonymity. Unlike centralised exchanges, which require users to complete know-your-customer (KYC) checks when opening an account, decentralised exchanges are anonymous and offer complete privacy. Another advantage is that there’s no hacking risk as these exchanges are not custodial in nature.

On the downside, decentralised exchanges do not facilitate the trading of fiat currencies for cryptoassets. This means they are not convenient for those looking to buy crypto with fiat currencies such as the British pound or the Euro. Decentralised exchanges also tend to lack liquidity. Only around 1% of crypto users transact through decentralised exchanges. This means that it can take some time for a trade to be executed.

Cryptocurrency exchange fees

Before trading with a cryptocurrency exchange, it’s important to understand the exchange’s fees. Crypto exchanges charge many different types of fees including:

  • Trading fees. These are typically charged on both fiat-to-crypto trades as well as crypto-to-crypto trades. They vary from exchange to exchange and can be based on a combination of factors including the size of the trade, the selected payment method, and market conditions such as volatility and liquidity.
  • Spreads. A spread is the difference between the cost to buy an asset and the cost to sell the same asset. Trading platforms often use spreads to generate extra fees. At present, Coinbase charges a spread of about 0.5% for cryptocurrency sales and purchases, however, this spread can change depending on market fluctuations.
  • Withdrawal fees. Some crypto exchanges charge a fee to withdraw your money. In most cases, the fee is on a per withdrawal basis and not a percentage of the withdrawal amount. eToro, for example, currently charges a withdrawal fee of $5.
  • Borrowing fees. Some crypto exchanges offer margin trading. This is where you can borrow money to increase the size of your position – a process known as using ‘leverage.’ Crypto exchanges that offer margin trading typically charge fees based on the amount borrowed. They often also charge an additional fee if a margin position is liquidated.
  • Custody fees. These are fees that exchanges charge to hold customers’ assets. They vary from exchange to exchange. Coinbase currently charges a 0.5% p.a. fee on a monthly basis.

While fees are important to consider when choosing a crypto exchange, don’t automatically rule out a platform just because it has higher fees. Higher fees can be a worthwhile trade-off for a higher level of security and extra features such as educational content and investment tools.

Cryptocurrency exchange currencies

The fiat currencies you can use to buy cryptocurrency vary by exchange. Some exchanges, such as Coinbase and Binance, support a range of different fiat currencies including the British pound, the US dollar, and the Euro.

Others, such as eToro, only let you buy crypto in US dollars. This means that if you are based in the UK and the pound is your home currency, you will need to convert your pounds to US dollars on the platform before you trade.

Cryptocurrency exchange security

Cryptocurrency exchanges are increasingly being targeted by cybercriminals, so it pays to do your research into security when choosing a platform. In 2020, there were nearly 30 attacks on crypto exchanges, the largest of which resulted in more than $200 million worth of crypto being stolen from Singapore-based exchange KuCoin.

Most of the major cryptocurrency exchanges such as Coinbase and Binance now have advanced security features in place. One example of a security feature that is very common is two-factor authentication (2FA). With two-factor authentication, you need to provide additional information whenever you log in, such as a code sent to you by text message.

Many platforms also have crime insurance in place to protect themselves against losses from theft or cybersecurity breaches. This can protect you if the platform is hacked. This insurance will not protect you, however, from any losses resulting from unauthorised access to your personal account due to a breach or loss of your login details.

One way to reduce your risk when investing in crypto is to spread your investments across multiple exchanges. This could protect you if one exchange is hacked.

Another way to reduce risk is to move your cryptoassets off the exchange’s platform and onto your own secure ‘cold’ crypto wallet that’s not connected to the internet. Cold crypto wallets are much harder to hack, although you’ll need to remember your passcode or you could lose access to your cryptoassets forever.

It’s worth noting that at present, crypto exchanges are not regulated in the UK. This means that if you buy crypto, you are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong. If your cryptoassets are stolen or your platform goes bust, for example, no one is responsible for helping you get your money back.

Cryptocurrency exchange order types

Most crypto exchanges allow you to place several different types of orders. The main types of orders are:

  • Market orders. When you place a market order, the exchange executes your trade at the best available market price in the order book. An advantage of market orders is that they are usually executed quite quickly. A disadvantage is that they are sometimes executed at unfavourable prices.
  • Limit orders. When you place a limit order, you instruct the exchange to execute your trade at a certain price (or better). An advantage of limit orders is that you always receive the price you want for your trades. A disadvantage is that they can take time to execute. If there is no matching buyer/seller to accept your price, your limit order will not be executed.
  • Stop loss orders. When you place a stop loss order, you instruct the exchange to sell your cryptoasset when it reaches a certain price. Stop loss orders are designed to help traders minimise losses.

Crypto exchange transaction limits

Most crypto exchanges have limits in place in terms of how much you can deposit, withdraw, and trade at once. These limits vary from exchange to exchange. They can also vary depending on where you are based and the type of account you have with the exchange.

With Coinbase, limits depend on your account level. For example, when you have a ‘Level 1’ account, the maximum trade size with 3D Secure (credit/debit card) purchases is £3,000. To increase your buy / sell limits, you may need to complete several verification steps and enable additional account features.

Crypto exchange deposits

There are several ways to fund purchases on crypto exchanges

The first way is via bank transfer. This will involve entering your bank details into the system. Bank transfer deposits generally take 1-3 days to go through so you usually can’t trade instantly.

The second way is via credit/debit card. This process tends to be instant meaning you can trade straight away. It’s worth noting, however, that some credit card companies do not allow you to buy crypto on their cards.

Usually, you have to provide some form of identification before you can fund your account or make a trade. These identification checks are for money laundering reasons.

Crypto exchange withdrawals

There are a few things to be aware of in relation to crypto exchange withdrawals.

The first is that some exchanges charge a fee to make a withdrawal. eToro, for example, charges a flat fee of $5 to make a withdrawal.

The second is that it can take some time for a withdrawal to be processed. Usually, withdrawals hit your bank account within a few days. However, sometimes, they can take much longer to clear.

A third issue is that many exchanges require you to complete identification checks before making a withdrawal. These identification checks are designed to stop money laundering.

Finally, some platforms have minimum and maximum withdrawal limits. eToro, for example, has a minimum withdrawal limit of $30.

Crypto exchange FAQs

Are cryptocurrency exchanges regulated?

In the UK, crypto exchanges are currently not regulated. This means that if you buy crypto through an exchange, you are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong. Some crypto exchanges do have ‘e-money licenses from the Financial Conduct Authority (FCA). This means they need to meet certain anti-money laundering and processing standards.

Are cryptocurrency exchanges safe?

Cryptocurrency exchanges are increasingly being targeted by hackers, so it pays to be careful when using them.

One way to reduce risk is to use multiple platforms. Another way to reduce risk is to transfer your crypto assets off the exchange and onto a wallet.

Are cryptocurrency exchanges free?

Most crypto exchanges charge users fees. Fees including transaction fees, trading spreads, custody fees, withdrawal fees, and margin fees.

Can I store my cryptocurrency on an exchange?

You can store your crypto on an exchange if it is centralised. However, storing crypto on an exchange is usually not recommended. Transferring your crypto to a crypto wallet is generally much safer.

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