What is a Cryptocurrency Exchange?

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Contributor, Benzinga
Updated: May 25, 2021

Cryptocurrency exchanges are online brokerages that allow you to trade cryptocurrencies. Most large exchanges are centralized exchanges, meaning that a central entity like Coinbase or Gemini controls your cryptocurrency positions off the blockchain. This year, however, decentralized exchanges have gained popularity among cryptocurrency investors. 

Decentralized exchanges are a new technology built on top of the blockchain. Blockchain is the underlying technology that powers cryptocurrencies like Bitcoin and Ethereum. Developers can upload code called smart contracts to the blockchain, and these smart contracts perform specific functions with the user’s money, replacing a centralized 3rd party. 

How to Exchange Cryptocurrency

If you want to buy cryptocurrency, there are several ways to go about your purchase. Some stock-trading platforms support cryptocurrencies, such as Robinhood. But, you don’t truly own your cryptocurrency on Robinhood — it just credits the funds to your account. Robinhood only allows its users to trade 4 cryptocurrencies: Bitcoin, Ethereum, Litecoin and Dogecoin. If you’re looking to trade a variety of crypto, use a dedicated cryptocurrency exchange. 

Consider cryptocurrency-related stocks, such as Grayscale Bitcoin Trust (GBTC). This public trust holds Bitcoin, allowing investors to speculate on the cryptocurrency using the New York Stock Exchange. These stocks offer fewer returns with the same amount if not more risk as Bitcoin. The trust takes a management fee for holding the Bitcoin, which you can do yourself on exchanges like Coinbase. 

You can also purchase Bitcoin directly from someone you know, and they can send the Bitcoin to your crypto wallet upon payment. Marketplaces like Craigslist have cryptocurrency investors willing to sell their Bitcoin for cash, but be careful of fraudulent sellers, as Craigslist doesn’t vet its users well.

These options don’t allow you to trade the vast majority of crypto, however, and aren’t nearly as efficient as dedicated cryptocurrency exchanges. Again, if you’re serious about investing in crypto, use a cryptocurrency exchange.

Best Bitcoin Exchange

The best Bitcoin exchange depends on your needs as an investor. If you want a simple user interface to buy and hold Bitcoin, then Coinbase is the answer. Coinbase offers a website and mobile app that allows you to purchase Bitcoin or other cryptocurrencies with USD. 

Another great choice for beginners is Gemini. Gemini is a centralized exchange that also offers a mobile application and a website. Its user interface is very simple, so you shouldn’t have trouble navigating through it, even if you’re a beginner. Also, Gemini offers its users a credit card that pays 3% cash back in cryptocurrency. 

If you want the most secure cutting-edge technology to trade cryptocurrencies use a decentralized exchange. Most decentralized exchanges don’t directly support Bitcoin — it doesn’t allow for smart contracts to be uploaded to its blockchain. 

There are ways to buy Bitcoin on a decentralized exchange, however, and one’s with Wrapped Bitcoin (WBTC). WBTC is the 14th-largest cryptocurrency by market capitalization, valued at $3.5 billion. WBTC is paired with Bitcoin’s price through smart contracts on Ethereum, allowing you to interact with Bitcoin on Ethereum’s network.

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Best Ethereum Exchange

Almost all cryptocurrency exchanges that allow you to exchange Bitcoin also let you trade Ethereum. Ethereum is the 2nd-largest cryptocurrency by market capitalization, worth about $145 billion.

If you’re a beginner looking to simply buy and hold your cryptocurrency investment, a centralized exchange is a good choice. Both Coinbase and Gemini allow you to exchange Ethereum on their platform. You can trade Ethereum against USD or Bitcoin on these exchanges.

Another great option, especially if you’re looking to invest in Ethereum or ERC20 tokens, is argent. ERC20 tokens are cryptocurrencies built on Ethereum’s blockchain, such as Tether, Binance Coin and Uniswap. 

Although argent is more of a wallet than an exchange, this application allows you to easily exchange any Ethereum or ERC20 token directly on the mobile app. Argent has a simplistic and secure mobile app which is a great way to get into decentralized finance. 

Depending on your needs, argent may be the best way for you to exchange Ethereum. Here’s a list of some pros and cons of using argent. 

Pros:

  • Interest earning: Argent allows you to put your cryptocurrency into savings accounts that yield up to a 10% annual interest rate.
  • Truly owning your crypto: Unlike centralized exchanges, argent lets you own your private keys. Your private key is what gives you access to your crypto from anywhere. 
  • Token variety: Argent supports all tokens that are built on Ethereum, including Ethereum itself. Many large exchanges don’t support smaller market cap ERC20 tokens, but argent does.

Cons:

  • Only access to Ethereum tokens: Since argent is an Ethereum wallet, it only supports Ethereum and Ethereum-based tokens. Users don’t have access to cryptocurrencies like Litecoin, Ripple and Bitcoin (you are still able to purchase Wrapped Bitcoin).
  • No off-chain transactions: Argent is decentralized — it cannot just credit your account with different currencies when you exchange tokens. The tokens have to actually be bought and sent to your wallet, incurring a blockchain transaction fee.
  • Only available on Google Play and IOS: Although argent has a website, you aren’t able to access your cryptocurrency or manage your finances through it. The only way to access your account is through argent’s mobile app.

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Best Altcoin Exchange

Altcoins are any cryptocurrencies other than Bitcoin. Thousands of altcoins are traded on exchanges but not all exchanges support every altcoin. Altcoins are a great way to invest your money aggressively, but there is generally more risk involved with trading altcoins than there is with Bitcoin. 

Coinbase is a good brokerage to invest in altcoins with. Coinbase is constantly adding more altcoins to its platform –– about 40 different cryptocurrencies are supported, most of which have been added in the past year. 

If you’re looking for an exchange that supports a wider variety of altcoins, then Binance is a great option. Binance supports hundreds of altcoins and offers its users other financial services on its exchange. 

Other than being a cryptocurrency exchange, Binance allows you to stake your cryptocurrency to earn interest on your holdings. It also offers margin trading to qualified users, which allows you to leverage your cryptocurrency holdings.

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Best Decentralized (DeFi) Exchange

Decentralized Finance (DeFi) exchanges have many benefits over traditional exchanges. Namely, you don’t need to trust a 3rd party to keep your funds secure and you actually own your private keys, which gives you direct access to your cryptocurrency. Also, DeFi exchanges don’t hold user information that traditional exchanges are required to do. 

Although there are benefits to using a decentralized exchange, most people are better off using centralized exchanges. The biggest advantage of a centralized exchange is lower trading fees, as centralized exchanges aren’t actually sending you the cryptocurrency you’re purchasing. 

To transfer cryptocurrency you must pay a transaction fee to the crypto miners that power the network. When Eth2, an upgrade to Ethereum’s network, releases later this year, transaction fees will significantly decrease, making DeFi a more viable option for many. 

Even with high transaction costs, users who want to earn an annual interest rate on their cryptocurrency holdings will turn to DeFi for the most competitive rates. The largest and most user-friendly DeFi exchange today is Uniswap

Uniswap is a DeFi exchange built on Ethereum. The platform allows you to exchange any Ethereum or ERC20 token directly from your wallet. Uniswap also offers liquidity pools where you can stake your cryptocurrency to earn interest. 

Liquidity pools are necessary for decentralized exchanges to work. Without any liquidity staked on the platform, it would be impossible to exchange your cryptocurrency directly from your wallet since there isn’t a centralized order book.

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Choosing a Cryptocurrency Exchange

The best cryptocurrency exchange for you depends on your needs. If you’re looking for the most simple and accessible way to start investing in cryptocurrencies, Coinbase and Gemini are great options. 

If you are a beginner looking to interact with DeFi, argent is a great choice. Although argent only supports Ethereum and ERC20 tokens, it is much more advanced than traditional exchanges. With argent, you can earn interest on your holdings, earn rewards from other DeFi platforms like Uniswap, and even invest in automated trading strategies through TokenSets.

All of these options offer a secure way to invest in crypto, so you should base your choice on how you intend to use your cryptocurrencies instead of perceived security. As DeFi grows more efficient, these exchanges will become more feasible with lower transaction costs. One day, these decentralized crypto exchanges may completely replace traditional crypto brokerages.

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