What is a crypto exchange?
Cryptocurrencies were originally developed to be decentralized, digital currencies which could be used around the world to buy goods and services without worrying about exchange rates or national inflation crises. However, they quickly became investment instruments that grew to be incredibly popular in part because there is currently no regulation of crypto trading.
The lack of regulation has allowed this sector to grow exponentially, but it also means that there is more risk involved and a heightened level of volatility. Exchanges are an essential aspect of the crypto investment sector, and they are very similar to other financial exchanges which may be used for commodities, securities or other investments.
How to use a crypto exchange
The process of using a crypto exchange is slightly different from other financial exchanges. Users must first create an account and will typically also be prompted to open a crypto wallet with the exchange or link their wallet to their account on the exchange.
Having a wallet linked to the account means that transactions can be made much more easily and quickly, streamlining the process. Once the user has linked their crypto wallet to the exchange, they can then purchase whatever crypto they like from the selection offered.
Crypto exchanges will typically have the biggest cryptocurrencies, such as Bitcoin, Litecoin, Ripple and Ethereum, along with many of the smaller cryptos such as Dogecoin, Shiba Inu and Avalanche.
Once the user has purchased the amount of crypto they want, they can then commence trading.
Types of crypto exchanges
There are really two main types of crypto exchanges that users should be aware of when choosing which exchange to register with.
The first type of exchange is a centralized exchange, which is the most common exchange platform. Centralized exchanges use third parties to help process aspects of transactions including security, price monitoring and social trading.
Some of the traders who would be considered purists do not like this kind of platform because it is viewed as contrary to the main purpose of crypto which is to have a fully independent, decentralized system. For others however, centralized crypto exchanges are incredibly useful and help them to quickly check the Dogecoin price before buying or selling.
The second form of exchange is the decentralized exchange. Trades which are made on decentralized exchanges have no third parties or middlemen whatsoever, instead, the traders only use the decentralized ledgers of crypto itself. This is a much less common form of trading and involves purely peer-to-peer trades that are recorded via smart contracts.
What to look for when choosing an exchange
There are many different crypto exchanges currently active on the market, so it can be difficult to choose the right platform if you are unsure of what to look for. Below are a few of the factors you will want to consider when choosing an exchange.
The first thing you should do is ensure that all the cryptos you are interested in, whether that is Doge, Ripple or Shiba Inu, are offered.
This is of course a significant consideration which hardly needs explanation. The only thing to note is that a platform with higher fees can sometimes provide an overall experience that is much better than the free apps.
A number of high-profile hacks and breaches have brought security to the forefront of many crypto experts’ minds. You should definitely check out the security options for an exchange prior to registration and determine if the platform has any insurance policies in place for fraud or hacking. You will also want to look for systems with two-factor identification.
You should take note of your storage preferences – whether you like to have your crypto stored in your hardware wallet or on the exchange – and check to see whether your preference is accommodated.
Tools and extras
Some platforms will offer better tools, features and additional services than others, so this is definitely an aspect to look out for. Some of these features may include social trading, a high-quality mobile app or whether you can connect it to investment tracking apps.
Crypto investing best practices
The investment strategies for crypto investing are not altogether different from financial management strategies you would find anywhere else. It is important to only invest what you can afford to lose, and financial planners have suggested only investing about 10% of your investment fund into crypto because of its inherent volatility. When investing that 10%, it is important to also diversify the crypto you choose to mitigate risk.