cryptocurrency exchange
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Types of Cryptocurrency Exchanges

Cryptocurrency exchanges are online platforms or applications that let you buy Bitcoin and other types of cryptocurrencies. However, with hundreds of exchanges, how do you know which one to buy from?

Multiple types of exchanges exist, but the most common are fiat-to-crypto and crypto-to-crypto exchanges. Fiat-to-crypto exchanges are centralized: they are controlled and managed by a corporation or organization. Crypto-to-crypto exchanges can be either centralized or decentralized. Decentralized exchanges are called “dexes” and run entirely on a blockchain network.

All exchanges allow you to buy crypto depending on what type of funds you are using to purchase with.

Fiat-to-Crypto Exchanges

For starters in cryptocurrencies, the easiest way to convert dollars into Bitcoin is through a fiat-to-crypto exchange.

“Fiat” money is currency that is issued by a government entity and includes all traditional currencies like Canadian or US dollars. Fiat-to-crypto exchanges let you link a bank account to the exchange where you can deposit your money. After depositing funds, these types of exchanges make it very easy to buy and sell Bitcoin and other cryptocurrencies.

One of the most popular fiat-to-crypto exchanges is Coinbase. The platform has a very friendly user interface with a good amount of coins available to purchase. Coinbase began in 2009 selling just Bitcoin and recently went public on the stock market in early 2021

coinbase cryptocurrency exchanges
Coinbase Exchange

Benefits of Fiat-to-Cryptocurrency Exchanges

  • Ease of use: simply connect your banking information, fund your account, then buy cryptocurrencies with a few clicks
  • Less complex: user-friendly interfaces and navigation

Disadvantages of Fiat-to-Cryptocurrency Exchanges

  • Usually higher fees: per-transaction fees and deposit/withdrawal fees are higher when compared to crypto-to-crypto exchanges
  • Less variety: the number of cryptocurrencies available to buy and sell are usually limited to larger market cap coins
  • Less functionality: limited or no charting tools, unavailable order types (i.e. limit orders)

Fiat-to-Crypto Exchanges to Buy and Sell Crypto

Before registering for any exchange, always review the rules and restrictions because some exchanges are available only in certain countries.

* Some exchanges also accept credit cards to buy crypto. We do not recommend this as some banks have placed restrictions and treated credit cards as cash advances.

Crypto-to-Crypto Exchanges

Crypto-to-crypto exchanges are more complex because they require you to already have crypto to make trades. Because you are not able to deposit fiat money into these exchanges, you will have to deposit popular cryptocurrencies like BTC or ETH to purchase other types of crypto.

Although crypto-to-crypto exchanges require more steps to start, they offer a wider variety of coins than fiat-to-crypto exchanges. Crypto-to-crypto exchanges also provide more advanced users with features like additional order types, charting tools, and staking.

Benefits of Crypto-to-Crypto Exchanges

  • More variety: the number of cryptocurrencies available far exceed fiat-to-crypto exchanges
  • More functionality: more tools and options instead of just buying and selling

Disadvantages of Crypto-to-Crypto Exchanges

  • Fairly complex: difficult to learn and use if never used a trading brokerage platform
  • Cannot withdraw to banks: because crypto-to-crypto exchanges operate in crypto, you will have to transfer coins into a fiat-to-crypto exchange to withdraw from there

Crypto-to-Crypto Exchanges

Before registering for any exchange, always review the rules and restrictions because some exchanges are available only in certain countries.

Risks of Cryptocurrency Exchanges

There is always some level of risk when putting your money into a third party exchange. Although the industry is getting safer, platforms have been hacked and shut down completely, causing users to lose all their funds. 

To mitigate this risk, choose high-quality exchanges, setup two-factor authentication, or move your funds right out of the exchanges after you buy them.

Exchange Quality

Choose exchanges that are popular, have high volume, and have been active for a long time. Avoid exchanges that have little to no volume or have poor user interfaces. A quick search on Google and Reddit for reviews and community engagement is also recommended.

Two-Factor Authentication

Even if exchanges get hacked and hackers get control of your username and password, loss of funds can be prevented with two-factor authentication (2FA). With 2FA, a third-party application is connected to your exchange account that provides a unique passcode. The passcode must be entered every time you log into the exchange. This makes it necessary for the actual user of the account to have two methods (the log-in information and a passcode) to access the funds.

Not Your Keys, Not Your Coins

When you hold cryptocurrencies in an exchange, you actually do not have full custody of your coins. This is because you do not control your private keys. A private key is a unique passphrase that provides you access to your cryptocurrencies directly on the blockchain.

With an exchange, they are responsible for keeping custody of your funds and maintaining the private keys. To take full ownership of your cryptocurrencies and eliminate any risk from leaving your funds on exchanges, transfer your coins to a digital wallet. A digital wallets is an application on your mobile device that provide you with your own private keys so you get direct access to your cryptocurrency.

Other Considerations

With a growing number of cryptocurrencies coming out every day, choosing the right exchange can be a difficult. A great resource to find which cryptocurrency exchanges trade your favourite coins is CoinMarketCap. CoinMarketCap provides excellent information on all types of cryptocurrencies and has a “Market” section for every listing.