Different Types of Crypto Exchanges
Bitcoin pioneered an industry worth more than $450 billion. Bitcoin dominates 40% of the industry’s trading volumes while emerging cryptos take up the rest. However, it’s the emerging cryptos that seem to be driving the highest growth rate in the industry.
In 2017, Ripple was the fastest rising cryptocurrency in the world. It averaged a growth rate of 38,000%. NEM came in second and DASH third. Bitcoin averaged a growth rate of 1,300% and ranked 14th in the list of the best performing cryptos in 2017. If you are considering investing in Bitcoin, it’s also important to consider investing in other cryptos.
Unfortunately, getting a good exchange where you can buy any crypto with cash is difficult. Cryptocurrency trading websites tend to work differently. They accept different payment methods and some serve specific geographical areas. Learn how different exchanges work and examples of the best exchanges to purchase any cryptocurrency.
Fiat vs. Crypto to Crypto Exchange
In general, cryptocurrency exchanges can be categorized based on how they accept payments. Fiat to crypto exchanges accepts cash for cryptos while crypto to crypto exchanges accept Bitcoin or Ethereum as base currencies for trading other coins.
Fiat to Crypto Exchanges
There are dozens of exchanges that will take your money in exchange for a cryptocurrency like Bitcoin or Ethereum. Unless you are a Bitcoin miner, you probably will also have to go through a fiat to crypto exchange to buy Bitcoins. Fiat to crypto exchanges operate in the following ways:
- A centralized exchange like Coinbase that sells Bitcoin, Ethereum, and Litecoin for cash
- A peer to peer exchange like LocalBitcoins where buyers meet sellers and pay for Bitcoins using cash, credit card or wire transfers
- A brokerage firm that takes your cash and uses it to buy Bitcoin for you from another exchange or person
- An app like Changelly that accepts your cash and buys cryptos from an exchange offering the best deals
- A website like Virwox that accept easy to charge-back payment methods like PayPal and sells Bitcoins to you albeit with high commissions
Crypto to Crypto Exchange
Cryptos to crypto exchanges are growing in popularity rapidly. In fact, the world’s largest trading platform based on 24-trading volumes, Binance, only accept cryptocurrencies. In the top 20 largest exchanges in the world based on trading volumes, half of them are crypto to crypto exchanges. These exchanges operate in any of the following ways:
- A centralized exchange like Binance, where you fund an account with Bitcoins or Ethereums and use your funds to trade other coins
- A decentralized exchange like IDEX where you hold cryptos in your wallet and only use the exchange to trade
- A peer to peer exchange like Bitsq where buyers find sellers and trade Bitcoin for other cryptos
How Different Exchanges Work
Centralized Bitcoin or altcoin exchanges are often referred to as regular exchanges. They operate in the traditional sense of an exchange website. Often designed like a simple form where anyone can sign up and buy coins, regular exchanges are best suited for all types of traders.
Features of a Regular Exchange
- They are centralized in nature and managed by a specific company
- They have simple website designs for ease of use
- They accept cash payments or cryptos
- They provide an in-house wallet where they deposit cryptos after you pay for them
Regular exchanges often also ask for lots of personal information as part of their anti-money laundering efforts. On an exchange like Coinbase, for example, you must produce identity documents and go through an identity verification process before you are allowed to buy cryptos.
While the process is made out of genuine reasons, it exposes your personal information in an inconvenient way. A rising number of exchanges don’t need your personal details to allow you to trade. A cryptocurrency exchange like flyp.me was primarily designed to enable traders to buy cryptos anonymously. The exchange does not also store your coins, allowing you to have total control of your funds.
Peer to Peer Exchange
Peer to peer exchanges are sometimes underrated because of their potential to attract scam traders. However, the best P2P exchanges are designed to facilitate trading in the most trustless manner. A p2p exchange like LocalBitcoins holds coins in an escrow account and releases them only after the seller receive funds. Others like IDEX use Ethereum’s technology, smart contracts, to hold funds until they are paid for.
Features of P2P Exchanges
- They are centralized or decentralized in nature
- They list adverts of potential Bitcoin sellers and their terms
- They use an escrow account or smart contracts to ensure traders are honest
- Buyers find sellers who can accept a favorable payment method
- Because P2P traders are allowed to use credit cards and PayPal, they can ask for chargebacks and scam other traders
Cryptocurrency Brokerage Firms
While trading cryptocurrencies is fun for some, some people find the whole Bitcoin buying and trading process too much to handle. However, most people would still want to make profits by investing in cryptos. That’s where brokerage firms come in handy. They allow you to fund a Bitcoin or any other crypto account using real cash and watch as your funds gain value.
Some brokerage firms do the hard work for you and take commissions from your profits. An exchange like Etoro, on the other hand, allows you to buy Bitcoins, copy expert traders’ trading moves and make more profits. Etoro does not give you real Bitcoins also but money worth the real value of the cryptocurrency.
Features of Brokerage Firms
- Centralized management
- They mainly deal with Bitcoin and major altcoins
- They allow you to copy expert traders or they execute trades for you
- Some like Etoro do not offer real Bitcoins
Buying cryptocurrencies can be hectic. Bitcoin forums are filled with all sorts of complaints from unhappy traders. Exchanges close down month after month, sometimes with traders’ assets. But given the bullish run of top cryptocurrencies, you may be tempted to invest. Make your investment process less hectic by researching and using the best exchange site.