What Is a Cryptocurrency Exchange?
A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees, but they tend to have more complex interfaces with multiple trade types and advanced performance charts, all of which can make them intimidating or even unsuitable for new crypto investors.
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While these companies’ standard trading interfaces may overwhelm beginners, particularly those without a background trading stocks, they also offer user-friendly easy purchase options.
The convenience comes at a cost, however, as the beginner-friendly options charge substantially more than it would cost to buy the same crypto via each platform’s standard trading interface. To save on costs, you might aim to learn enough to utilise the standard trading platforms before you make your first crypto purchase – or not long after.
An important note: as someone new to crypto, you’ll want to make sure your exchange or brokerage of choice allows fiat currency (such as sterling and dollar) transfers and purchases made with sterling. Some exchanges only allow you to buy crypto using another crypto, meaning you’d have to find another exchange to buy the tokens your preferred exchange accepts before you could begin trading crypto on that platform.
Related: Best Crypto Exchanges
1. What Is a Cryptocurrency Broker?
Cryptocurrency brokers take the complexity out of purchasing crypto, offering easy-to-use interfaces that interact with exchanges for you. Some charge higher fees than exchanges. Others claim to be “free” while making money by selling information about what you and other traders are buying and selling to large brokerages or funds or not executing your trade at the best possible market price.
While they’re undeniably convenient, you have to be careful with brokers because you may face restrictions on moving your cryptocurrency holdings off the platform. With some, for example, you cannot transfer your crypto holdings out of your account.
This may not seem like a huge deal, but some crypto investors, especially advanced investors, prefer to hold their coins in crypto wallets for extra security. Some even choose hardware crypto wallets that are not connected to the internet for even more security.
2. Create and Verify Your Account
Once you decide on a cryptocurrency broker or exchange, you can sign up to open an account. Depending on the platform and the amount you plan to buy, you may have to verify your identity. This is an essential step to prevent fraud and meet anti-money-laundering regulatory requirements.
To buy crypto, you’ll need to make sure you have funds in your account. You might deposit money into your crypto account by linking your bank account or making a payment with a debit or credit card (watch out for high charges from your card provider with the credit card option – see below).
You may not be able to buy or sell cryptocurrency until you complete the verification process. The platform may ask you to submit a copy of your driver’s licence or passport, and you may even be asked to upload a selfie to prove your appearance matches the documents you submit.
3. Deposit Cash to Invest
Depending on the exchange or broker and your funding method, you may have to wait a few days before you can use the money you deposit to buy cryptocurrency.
Here’s one big buyer beware: while some exchanges or brokers allow you to deposit money from a credit card, doing so is extremely risky – and expensive. Credit card companies process cryptocurrency purchases with credit cards as cash advances. This means they’re subject to higher interest rates than regular purchases, and you’ll also have to pay additional cash advance fees.
4. Place Your Cryptocurrency Order
Once there is money in your account, you’re ready to place your first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, ranging from well-known names like Bitcoin and Ethereum to more obscure cryptos like Theta Fuel or Holo.
When you decide on which cryptocurrency to purchase, you can enter its ticker symbol – Bitcoin, for instance is BTC – and how many coins you’d like to purchase. With most exchanges and brokers, you can purchase fractional shares of cryptocurrency, allowing you to buy a sliver of high-priced tokens like Bitcoin or Ethereum that otherwise take thousands of pounds to own.
5. Select a Storage Method
Cryptocurrency exchanges are not backed by protections like the UK’s Financial Services Compensation Scheme, and they’re at an additional risk of theft or hacking.
You could even lose your investment if you forget or lose the codes to access your account. That’s why it’s so important to have a secure storage place for your cryptocurrencies.
As noted above, if you’re buying cryptocurrency via a broker, you may have little to no choice in how your cryptocurrency is stored. If you purchase cryptocurrency through an exchange, you have more options:
Leave the crypto on the exchange. When you buy cryptocurrency, it’s typically stored in a so-called crypto wallet attached to the exchange. If you don’t like the provider your exchange partners with or you want to move it to a more secure location, you might transfer it off of the exchange to a separate hot or cold wallet. Depending on the exchange and the size of your transfer, you may have to pay a small fee to do this.
Hot wallets. These are crypto wallets that are stored online and run on internet-connected devices, such as tablets, computers or phones. Hot wallets are convenient, but there’s a higher risk of theft since they’re still connected to the internet.
Cold wallets. Cold crypto wallets aren’t connected to the internet, making them your most secure option for holding cryptocurrency.
They take the form of external devices, like a USB drive or a hard drive.
You have to be careful with cold wallets, though: if you lose the key code associated with them or the device breaks or fails, you may never be able to get your cryptocurrency back.
While the same could happen with certain hot wallets, some are run by custodians who can help you get back into your account if you get locked out.