What is a cryptocurrency exchange? Everything a beginner needs to know
There was a time when owning digital assets seemed strange and immense, but their popularity has grown lately. This article will help you understand how a centralized cryptocurrency exchange works and how a beginner can get started.
What is a crypto exchange?
A cryptocurrency exchange is a platform where registered individuals or companies can buy, sell, and trade crypto. A crypto exchange allows you to quickly swap one cryptocurrency for another or fiat money for crypto. Thus, the exchange is an intermediary between the buyer and seller of cryptocurrency, ensuring such transactions’ security.
Before the first cryptocurrency exchanges appeared, people only bought bitcoin by mining or through negotiations on various online forums. Now, most people who are interested in the crypto industry start their trading path on exchanges. Exchanges have simplified the process of getting acquainted with the crypto industry. Now it takes only a few minutes to buy your first bitcoin.
Types of crypto exchanges
There are several types of cryptocurrency exchanges:
- Centralized exchanges (CEX);
- Decentralized exchanges (DEX);
- P2P platforms (Peer-to-Peer).
Let’s find out how they work.
Centralized exchanges (CEX) are platforms with a “central governing body” that regulates the operation of the exchange. CEXs act as intermediaries between users that want to buy or trade cryptocurrencies, which means they cannot directly exchange assets. Instead, most exchanges support fiat currencies, allowing users to fund their accounts with traditional money through bank transfers or other means.
The main centralized crypto exchange features are an intuitive and user-friendly interface and the provision of numerous trading tools for interacting with cryptocurrencies.
Centralization allows the service to:
- Work in the legal field;
- Protect user assets;
- Have extensive functionality for trading;
- Work with fiat (state) currencies.
Such a crypto exchange is responsible for the safety of assets and helps restore account access. As a rule, it has a built-in wallet for storing digital assets.
CEXs comply with the financial laws of the country where they were registered. For full access to the trading tools of the platform, the user needs to confirm his identity.
On the one hand, centralized exchanges contradict the main principle of blockchain technology: the absence of centralization, which is any control authority. On the other hand, the exchange administration has access to user accounts. Therefore, it can transfer data to government agencies and block an account or a specific transaction upon request.
On the other hand, centralized exchanges have a staff of specialists who ensure the protection of assets and data. Of course, no exchange will give a 100% guarantee against criminals, but there is a set of measures that CEXs apply to protect the balance of users. Among them:
- KYC (Know Your Customer)user verification — the procedure “Know Your Customer” allows the exchange to confirm the identity of the user and the latter to access all the functions of the platform;
- Customer Due Diligence (DD) — risk assessment of the client’s profile. It will show whether the user was involved in financial fraud;
- Transaction monitoring — specific actions that help to detect suspicious activity and, if necessary, suspend the account;
- Cold storage is the storage of most assets on a wallet that is offline and difficult to access for a hacker attack;
- Monitoring of IP addresses by which the user enters the exchange.
These measures are part of the AML and CFT complexes (anti-money laundering and countering the financing of terrorism), which ensure the reputation of the exchange and the protection of customers.
In addition, CEX platforms use additional features such as:
- Two-factor authentication (2FA);
- Web Application Firewall (WAF);
- Temporary blocking of withdrawals after changing the email address or phone number;
- The function of setting session duration time and PIN for CEX applications.
Security measures may differ from exchange to exchange. However, any secure cryptocurrency exchange should support 2FA, KYC verification and store most of the users’ assets on cold wallets.
For example, WhiteBIT has all of the above protection mechanisms. It also stores 96% of assets on cold wallets and uses WAF (Web Application Firewall) to block hacker attacks on time. In addition, the platform passed the Hacken.io audit, a leading cybersecurity service provider specializing in blockchain technologies. According to the audits of Hacken.io and the CER.live certification platform in 2022, WhiteBIT meets the highest security requirements and is among the top three exchanges in terms of reliability with the highest AAA rating.
Decentralized exchanges (DEX) bring together buyers and sellers of cryptocurrencies and work on the blockchain. Unlike CEX, decentralized platforms are non-custodial. So, the user is responsible for his private keys when making transactions. Without a central authority, DEXs use smart contracts to execute and record transactions on the blockchain. In addition, since DEX does not store users’ assets, there is less chance that hackers will target assets, unlike the hot wallets of centralized exchanges.
DEX only needs liquidity providers and traders to operate successfully. Traders use the platform to make exchanges (swaps), and investors provide liquidity to DEX and receive a small percentage of each transaction.
Decentralized exchanges allow users to:
- Maintain anonymity;
- Make transactions directly from their wallet;
- Receive passive income;
- Avoid the possibility of account blocking.
DEX is in the early stages of its development, so that it can be challenging for those less familiar with blockchain technology.
You cannot buy cryptocurrency on DEX because such crypto exchanges do not support fiat. Therefore, to start trading, you need to purchase assets using different services and online exchangers. Plus, you need to connect a crypto wallet. Although decentralized exchanges do not require KYC, third-party services may request KYC verification before buying cryptocurrency.
The disadvantages of DEX include the following:
- Lower liquidity compared to CEX;
- High exchange fees;
- A limited number of order types;
- Lack of ability to challenge transactions;
- Complex interface for beginners;
- Impossibility of high-frequency trading (the speed of order execution depends on confirming transactions in the blockchain).
Also, DEXs usually push back newcomers. So, these platforms are most popular among experienced users. A good example is WhiteSwap, an AMM exchange (automated market maker) running on the Ethereum and Tron blockchains. It has the WSD control token, which allows its owners to participate in the project’s development.
P2P platforms (Peer-to-Peer)
Peer-to-Peer platforms (P2P) are platforms where users can buy and sell cryptocurrency or fiat assets to each other. They work like a bulletin board, meaning buyers and sellers can view ads or post their own.
Features of P2P platforms:
- No KYC verification;
- Independent selection of applications;
- Trading with escrow protection;
- Large selection of payment methods;
- Direct exchange of assets without intermediaries.
To invest in cryptocurrency, you need to register and place an ad. It indicates the amount of asset, price, payment terms and method, transaction limits, and margin.
After the client has placed a buy/sell announcement, the required assets are algorithmically transferred to a temporary deposit — an escrow system. The exchange won’t happen until both parties confirm the transaction.
All users on the P2P platform have a rating, based on which you can choose the transaction participants.
The advantages of P2P trading are:
- Minimal commissions;
- The ability to withdraw from the transaction;
- Intuitive interface.
At the same time, there are disadvantages:
- Low speed of transactions;
- Complete anonymity of users;
- The possibility of stumbling upon a fraudster.
However, some platforms successfully protect customers from fraudsters. For example, there are no commissions for buying/selling cryptocurrency on the Bitcoin Global platform. There is a mobile application, a telegram bot, and a wallet. Instant transfers using WhiteBIT codes and its deposit system are available on the platform. In case of an attempt to deceive the buyer, you can contact the support service, open a dispute and, if the decision is favorable, get the purchased assets back.
Difference between DEX and P2P platforms
P2P platforms, like decentralized exchanges, have no third-party supervision and depend on peer-to-peer (P2P) trading. P2P exchanges have taken the ability to trade fiat from centralized exchanges. In addition, P2P has an escrow system that is unavailable on DEX. Also, unlike the P2P platform, it is not possible to challenge a transaction on DEX. Thanks to this combined operation, P2P paves the way for beginners’ trading and is a convenient tool for experienced traders.
How to choose an exchange?
Before choosing a crypto exchange, there are several important factors to consider.
How safe is the crypto exchange?
One of the biggest problems threatening cryptocurrency exchanges is hacker attacks. To begin with, you should pay attention to how seriously the exchange pays attention to its security measures. Such as:
- Two-factor authentication;
- Reliable security measures against phishing scams, attacks, and other theft attempts;
- Support for biometric login;
- How many assets are held in a cold wallet;
- KYC standards (the need to provide a government-issued identification document before opening a new account on a cryptocurrency exchange).
How many trading pairs are there?
Coins with higher market capitalization are more often present on most exchanges. Therefore, investors looking for more exotic assets should pick platforms with many pairs. There will likely be both the most popular and not very well-known coins.
What fiat currencies are available?
If you are interested in exchanging fiat for cryptocurrency, decentralized exchanges are off the table. So, in this case, the choice between different CEX and P2P platforms will depend on whether they have the fiat currency you need.
What are the fees?
Fees will accompany all transactions on cryptocurrency exchanges. The largest platforms usually have transaction fees of 0.2% or lower. However, remember that even on the same platform, fees may differ depending on the type of transaction.
Is there a possibility of passive earnings?
Although exchanges are primarily aimed at allowing users to buy and sell virtual assets, many introduce reward programs to increase their wealth. The terms and bonuses will depend on the platform. Also, some platforms offer to open crypto deposits. For example, WhiteBIT Earn offers crypto deposits at interest rates ranging from 0.4% to 30% of income on certain assets.
Why choose WhiteBIT?
WhiteBIT is the largest European centralized cryptocurrency exchange. More than 270+ crypto assets and 6 fiat currencies are already on the exchange. WhiteBIT has more than 3.5 million registered clients worldwide. The average daily trading volume is over $2.5 billion.
WhiteBIT is an ecosystem that includes the following:
- WhiteBIT codes — instant and free transfers between wallets on the exchange;
- WhitePay — cryptocurrency payment processing system;
- Bitcoin Global — a P2P platform that allows users to exchange cryptocurrency around the world;
- WhiteBIT Earn — a system that provides an opportunity to receive passive income from long-term investments in digital assets;
- WhiteSwap (AMM DEX) is a safe and convenient decentralized exchange running on the Ethereum and Tron blockchains;
- Trading tournaments — one of the types of activities on WhiteBIT, which makes it possible to replenish the collection with new crypto assets;
- Anti-Money Laundering (AML) — a web page for checking an address for involvement in money laundering;
- WhiteEX – physical cards for replenishing the balance on the WhiteBIT exchange.
Also, WhiteBIT clients have a wide range of earning opportunities.
Registered users can trade with their own (Spot) and borrowed funds (Margin/Futures). The leverage can be set from the available values — from x1 to x20.
Users can use Limit, Market, Stop, and OCO orders to buy and sell coins.
Registered users of the exchange have access to numerous platform activities. As a rule, these are trading tournaments, meme battles, quizzes, and giveaways. In addition, each activity raffles off a generous prize pool in cryptocurrency.
Thus, with WhiteBIT, users get an easy-to-use product that helps them get acquainted with the crypto sphere and discover promising profit methods.
The difference in the work of crypto exchanges depends on their type. There are the following types of cryptocurrency exchanges:
According to audits by Hacken.io and the CER.live certification platform in 2022, WhiteBIT meets the highest security requirements and is one of the top three exchanges regarding reliability with the highest AAA rating.
Our exchange was founded only in 2018, and it already offers more than 350+ trading pairs, 270+ assets, and 6 state currencies. More than 3.5 million registered WhiteBIT clients have experienced a low trading commission of up to 0.1% and tried the convenient mobile application with an intuitive interface and access to trading.
Also, Ukrainian citizens can pass a quick KYC verification through the state portal of services "Diia".