How do Crypto Exchanges Work?
If you're new to cryptocurrency you might be curious about where you can get some of this magic money everyone's talking about. If you have spare computing power and electricity you can mine for Bitcoin and other cryptos, but most people find it easier to simply purchase it with fiat currency like the US dollar. This is where exchanges come in.
An Online Market for Bitcoin
Cryptocurrency exchanges allow users to buy, sell and trade their crypto and fiat currencies with other users all around the world. A cryptocurrency exchange is similar to stock exchanges like the NYSE or NASDAQ but for crypto instead of stocks. There are some key differences between traditional stock exchanges and crypto exchanges, outlined below:
- Unlike traditional stock markets that are only open during normal business hours, crypto exchanges are open 24/7, 365 days a year.
- Crypto exchanges trade exclusively in cryptocurrencies and sometimes derivatives, futures, and options contracts.
- Because cryptocurrency is so new many countries and states do not have stringent laws and regulations for the industry.
- Some types of crypto trading or crypto exchanges are banned in certain countries and jurisdictions.
How Does It Work?
Once you've signed up with an exchange you can purchase your chosen crypto using a credit, debit card or bank account. This process usually requires you to verify your identity to comply with anti-money laundering laws. After you purchase some Bitcoin or other crypto you'll also have to wait up to five business days before you can move your money off the exchange. Most exchanges will, however, allow you to begin trading your dollars or other fiat currency for crypto right away. The exchange will take a fee for the transaction and allow you to invest what's left in crypto.
So for example you could sign up on Coinbase and spend $1000 on Bitcoin. You'll end up paying roughly a $15 fee to exchange this money for Bitcoin at whatever the current market rate is. At that moment you'll have around $985 worth of Bitcoin and the value will immediately begin to go up or down depending on the current market conditions. If it's a bull market the value of your investment will rise. If it's a bear market the value of your investment could fall. The exchange will generally show you a grand total showing how much your investments are currently worth.
Which Exchange is Best?
The answer to this question depends on several factors including where you live, what your investment goals are, and what type of cryptocurrencies you want to invest in. This post will focus primarily on the main options for our US based visitors.
Coinbase - Good for beginners. If you're making your first crypto purchase and plan to store less than $5000 worth of crypto this is a good choice.
Coinbase Pro - Lower fees, suitable for intermediate/advanced users. Like the name implies, this is the professional version of the Coinbase platform. It's got fancy stock graphs and a trading interface that will look familiar to anyone who's ever traded stocks or equities.
Kraken - Full-fledged trading platform, lower fees than Coinbase. Kraken is available in most US states and is suitable for professional traders and new users alike. They have recently launched a simplified smartphone app to compete with other beginner friendly platforms like Robinhood, Coinbase, and Paypal.
Binance.us - Binance is an international exchange that operates in many different countries. Due to conflicts with regulators Binance was forced to stop doing business in the United States. Instead they launched a US-based site called binance.us that has fewer features and investment options than the main Binance site. Binance.us is available in 43 US states. Sorry folks in Connecticut, Hawaii, New York, Texas, Vermont, Idaho, and Louisiana!
Robinhood - I do not recommend purchasing cryptocurrency through Robinhood because once you do, there is no way to withdraw your crypto to a private wallet. In other words once you buy some Bitcoin or Dogecoin on Robinhood you are trapped on their platform with no way to move your crypto off it.
Paypal - Paypal is another good choice for beginners but as of this writing there's no way to withdraw your crypto funds once you purchase them. Paypal has promised this feature is coming soon so that may have changed since this post was published.
Exchange or Private Wallet - Which is Safer?
Crypto enthusiasts have a popular saying, "Not your keys, not your coins." This refers to the private keys that guard the user's wallet. When you purchase crypto from an exchange they create a wallet and host it for you. With a private wallet you hold the keys yourself. There are pros and cons to each approach.
If you're brand new to crypto and investing less than say $5000 or so you're probably better off keeping your crypto on the exchange as long as you follow all their safety and security steps to a T. You must enable multi-factor authentication and strong password security for your account, and most importantly never, ever click on links in emails or texts that ask you to reset your password. If you follow the security guidelines offered by your exchange this is a safe approach.
If you're investing more than $5000 we highly recommend getting yourself a hardware wallet and managing your own private keys. This is not as difficult or technical as it sounds. You can purchase a hardware wallet such as the Ledger or Trezor devices and store the private keys to your wallet on them. The advantage of this approach is that you are 100% in control of your crypto, and there's no way the exchange can take your coins or freeze your account without your permission.
Get Started Today
If you're ready to start your crypto investing journey please drop us a line. We can consult with you and help you choose an exchange and develop an investment strategy that works for you.