Simply put, a cryptocurrency exchange is a place where buyers and sellers can trade cryptocurrencies. You can only trade crypto via a crypto exchange because, at least for now, very few traditional investment firms offer it.
Generally, there are three types of crypto exchanges – decentralized, centralized and hybrid. In addition to investing apps and P2P platforms, there are other ways to buy and sell cryptocurrency, such as 1:1 trading.
Learn more about the different types of exchanges, how a crypto exchange works with a crypto wallet, and how to choose the best exchange for you.
How a Crypto Exchange Works
When you create an account with a crypto exchange, you can buy and sell cryptocurrencies like Bitcoin (BTC), ether (ETH), litecoin (LTC), polkadot (DOT), dogecoin (DOGE), and so on. Depending on the exchange, you can buy crypto with fiat currency, such as the U.S. dollar, or you can trade one crypto for another.
A larger and more established service is more likely to offer a range of cryptocurrencies. It is still advisable to make sure your desired crypto is available before setting up an account.
An exchange may allow you to trade one crypto for another, or you can use ordinary fiat currency to buy crypto. You can convert your crypto into regular currency, keep it in your account for future trades, or withdraw it as cash. Different exchanges and apps offer different services. Some services do not allow you to move your crypto outside of the platform to your own wallet.
Unlike traditional exchanges, cryptocurrency exchanges operate 24 hours a day, 7 days a week.
How to trade crypto on an exchange
You need to fund your exchange account – sometimes called a wallet – before you can start trading. In most cases, a digital Bitcoin wallet provided by a platform or app is held on that platform. For greater security, you should also create your own crypto wallet.
The trading prices of different crypto can then be viewed. The exchange does not set prices; they are determined by the market, and most exchanges reflect up-to-the-minute prices, though due to the decentralized nature of cryptocurrencies, there may be slight differences among exchanges.
Then, you can place a buy order for Bitcoin, ether, etc., and your order is added to the order book along with other buy and sell orders. Exchanges and online brokers generally charge fees for their services, depending on the type of platform you’re on (an exchange, an investing app, or a cash app). Crypto trading is typically more expensive than traditional markets, where fees have declined in recent years. For example, it is not uncommon to see fees as high as 5% per trade or more, although many are significantly lower: 0.5% or less per trade.
How Crypto wallets and Exchange work together
Keeping your crypto on the exchange where you bought it is probably the easiest way to manage it, but it also limits your options and can be less secure, since exchanges are vulnerable to hacking or cyber attacks.
A few exchanges offer insurance in case of theft, fraud, or collapse, but most are unregulated. You could lose your cryptocurrency if an exchange goes out of business, as two did recently in Australia in October and December of 2021.
Set up your own cryptocurrency wallet if you want a more secure option. While using a wallet is more complicated, for some investors the extra peace of mind is worth the effort.