Cryptoland Episode 4: Exchange much?

So over the past few episodes, we have dug deep into the foundational basics of Cryptoland, but like I keep emphasizing, this is just the tip of the iceberg. Now, you have money in your checking account and want to invest in crypto but need to know where exactly. This is where crypto exchanges come handy. Exchanges are businesses that allow the general public to buy, trade, and sell any form of digital or cryptocurrencies. Before exchanges, users could only trade through mining or organized transactions via online or offline forums.

First, let’s dig into the various types of exchanges available in the market.

1. Brokers

Some traditional securities brokers, though not pure crypto exchanges, can act as intermediaries between the cryptocurrency markets and investors who want to buy and sell digital assets. Anyone can visit an online broker and purchase cryptocurrencies at prices set by the broker. When doing large transactions, an over-the-counter broker protects customers from slippage (changes in market conditions and pricing). Some examples are capital.com and currency.com.

2. Traditional Crypto Exchanges

They facilitate the buying and selling digital assets based on daily market prices. Conventionally they charge a fee on each transaction which helps their business take care of operational costs. Some exchanges deal only with cryptocurrency, so you might need a wallet to start trading, whereas others allow you to use fiat currency to create your trade. In many countries around the world today, you can use a BTC ATM to buy your bitcoin, which could be used to start trading.

3. Centralized Cryptocurrency Exchange

A centralized cryptocurrency exchange is overseen by a third party, an exchange operator, which helps ensure that customer sign-up and trading runs smoothly. You could instantly sign up using your bank account and set up auto-pay options to make trading seamless. Some exchanges also allow you to link your wallets to trade using fiat or cryptocurrencies. Some examples are Binance, Kraken, and Coinbase Exchange.

4. Decentralized Cryptocurrency Exchange

Blockchain and cryptocurrency were designed with the belief that currency should not require a central authority to oversee its movement and usage. A decentralized crypto exchange, or DEX, lacks third-party oversight, is open source, and depends on peer-to-peer (P2P) trading. DEXs also often require more technical skill and intimate knowledge of cryptocurrencies than centralized exchanges. DEXs use smart contracts as a baseline to ensure the security and authenticity of the transaction on the blockchain. Some examples of DEXs are Uniswap, PancakeSwap, and dYdX.

How do I know which one is the right place for me?

This is where everything gets tricky. We do not know the exact fit for your use case, but we can provide some criteria you should look out for to make the best-informed decision. Just like a sense of fashion, exchanges are custom to each person’s financial lifestyle preferences. Both centralized and decentralized exchanges are new to this world, so you must do your due diligence before you pick one. Here are some criteria that you should look out for but not limited to:

1. Payment methods — the payment methods can be various but not limited to bank transfer, local payment rails or cryptowallets. Chose a method that is convenient and easy for purposes of accounting and with minimal transfer fees.
2. Deposits/Withdrawal limits — some exchanges have daily limits and freezes on certain types of coins because they might have low liquidity of their own assets in bulk. What does this mean for you? Well their liquidity is your liquidity so at that point it provides friction if you were to capitalize on an event and move money out of the exchange causing you to go through losses that happened during the FTX collapse.
3. Regional restrictions and regulations — some exchanges are locked based on geography. For example I use Binance which is locked to my resident location. I travel often and this harpens my ability to make transfers when I am travelling. Binance has their own reasons to do this, and FYI VPNs don’t work as effectively as they are supposed to in these kind of applications.
4. Fees — Exchanges have their own fees in addition to gas fees which are dependent on the network used to transfer the digital asset. So it is vital that when you are purchasing the coin you hold them on a universal network. For example TRON is great on binance when buying USDT, the combinations and permutations vary based on each exchange and asset you acquire.

1. Reputation — This is vital, most exchanges are not necessarily backed 1:1 with customer assets so market conditions can make or break them affecting every customer on the exchange. As you are aware of the FTX scandal which we touched on in an earlier episode, many customers and resellers were affected wiping out a bulk of wealth overnight. Hence it is vital to not only do research when choosing but also do the same every few days to ensure that your exchange is upholding its reputation and stability throughout the period of your relationship with them.
2. Verification requirements — The stronger and stringent the exchange is on this end, it reduces fraud and risk to the entire community. If it is tough to get into the exchange, it means that they do a great job on KYC and AML requirements. So the better their verification is the better it is for you. For example Binance has a stringent service before approvals and even periodically ensuring that legitimacy is maintained throughout the customer journey.

We recommend that you make your expansive list from this criteria to choose your trading platform. Over the past few years, some exchanges have been victims of hacks and bankruptcy, which does not protect your money, unlike the traditional banking sector. Always be wary while trading on these platforms, especially when doing peer-to-peer transactions, because checks are in place to prevent fraud. We hope this article helps you make the first step into Cryptoland.