A Bitcoin exchange is the digital marketplace you use when you want to buy or sell Bitcoin or other cryptocurrencies. These spaces work as an intermediary to enable buyers and sellers to interact and make exchanges with greater ease.
To use an exchange, you need a digital wallet, funds, and then to set your buy and limit orders. Afterward, you can simply place your order with the exchange, and it will be processed similarly to traditional asset exchanges.
Each exchange will offer many of the same basic services. Nevertheless, choosing which one to use will depend on the specifics of how you wish to use cryptocurrency.
Centralized vs. Decentralized
There are two main kinds of exchanges: managed exchanges and decentralized exchanges.
Managed or centralized exchanges function a lot like traditional market exchanges, with the main difference being that they deal in cryptocurrency. When you use a managed exchange, you are trading through a brokerage service. This means that they will act as an intermediary between the buyer and the seller, as such, you are not dealing with another person but with the exchange itself.
These exchanges have commission fees and buy-in minimums. And different exchanges will have unique services that are very useful to many. New traders may prefer centralized exchanges because they are often much more user-friendly and will accept multiple methods of payment.
One limitation of using a centralized exchange is that traders must share their personal and often banking information. This is for security reasons but also because these exchanges operate as businesses, and therefore must comply with the requisite ALM and KYC policies of its region.
Decentralized exchanges are a bit different because they are not typically run like businesses. Rather, they are shared amongst many nodes. However, there are often still fees that go towards running the platform, such as transaction fees.
The main difference is that decentralized exchanges act almost exclusively as a way to connect interested buyers and sellers. Some may offer brokerage services and have fees, but the transaction details are determined between the party members. These transactions are referred to as peer-to-peer, as there is no intermediary.
Bitcoin’s code was designed to function as a totally decentralized digital currency, which means that it is very safe to exchange anonymously. This is because there is no personal information shared, just the secret keys of the private exchange.
It is important to note that there is nothing necessarily nefarious about trading Bitcoin anonymously. Peer-to-peer and the decentralized ethos is the preferred method of many cryptocurrency users. That being said, it is becoming more challenging to keep all cryptocurrency transactions off the books, as many governments now treat digital currencies as an asset that can be taxed.
When deciding what kind of exchange to use, there are several factors to consider:
- Methods of payment: Managed exchanges will have a greater variety of methods of payment, such as credit cards, PayPal, and wire transfers. However, to hold and buy cryptocurrency, all you need is a digital wallet that can be loaded with funds by multiple means.
- Analytics: Each exchange will offer a certain amount of trading analytics on Bitcoin and other cryptocurrencies. These are very useful for understanding the market. Choose a service that offers data specific to your trading needs.
- Cryptocurrency Trading pairs: While nearly all exchanges accept Bitcoin, they will accept other cryptocurrencies as well. Exactly which cryptocurrencies are accepted varies between exchanges. This means that you can often trade between cryptocurrencies on an exchange.
- Country of the investor: Similarly, different exchanges will accept different fiat currencies. Be sure that the exchange you use accepts whichever fiat currency or methods of payment you wish to use. This will also mean that not all exchanges are available to you and your region. Location limitations can often be circumvented by using decentralized exchanges, as they will have fewer restrictions.