The Ultimate Guide to Crypto Exchanges
Participating in the cryptocurrency scene can be done in three distinct ways: interacting with the smart contracts built on certain chains, mining crypto transactions, and trading crypto.
It is the third option that is the most dominant and accessible means through which both casual enthusiasts and devotees involve themselves. Additionally, trading is currently crypto’s primary function too. What those who buy and sell Bitcoin, Ethereum, Dogecoin – whichever coin it is – are doing is putting their money and faith in that coin’s future use.
Take Bitcoin, for instance: traders have chosen to invest in bitcoins because they predict that it will become a popular and universal tender that businesses, governments, and/or individuals accept for products and services. Cryptocurrencies, while valuable for future use, will always being looking to the future and thus will always hold value in this way, making it an asset.
Crypto exchanges are the platforms that make trading Bitcoin, Ethereum, and any crypto much easier than it used to be.
The Centralising Power of Exchanges
Before exchanges, in the early days of the inaugural crypto Bitcoin, transactions could only be organised by individuals or groups. There was no intermediary platform which facilitated the quantity and scale of transactions that leaders like Binance, Kraken, and Coinbase are seeing today. This is the key evolution in the history of cryptocurrency but one that, arguably, effaces its key ethos: decentralisation.
Due to the trade volume, liquidity, and the fact that they are operating as companies with profit interests (or, in other words, a third party), the likes of Binance, Kraken, and Coinbase are essentially centralised entities, acting as a funnel for practically all crypto transactions. This centralisation is something crypto enthusiasts and prominent figures like Ethereum founder Vitaly Buterin warn against, and feel is a fundamental hurdle for the security, inclusivity, and prosperity of cryptocurrencies. However, centralised exchanges are popular and do have key benefits which crypto moving in the right direction.
User-friendliness, reliability and abundance of liquidity and availability are three of the key reasons for crypto exchanges becoming the go-to for individual traders and brokers. All of the reasons can be consolidated under a single banner: simplicity. Cryptocurrencies are complex. Anything that distils complex things into consumer-facing services is successful in the contemporary world. As such, the experience of storing, buying, and selling cryptocurrencies made easy by a (centralising) company is, for some, a necessary evil for the purpose of legitimising and showcasing the uses of crypto to the wider world.
The Regulation of Exchanges
We’ve established the centralising power these exchanges have. This position is being recognised by governments and institutions across the world, namely through regulation. Few governments have taken the steps to fully incorporate and regulate crypto directly – meaning with policies and legislation that explicitly cite and make reference to crypto – while some have outlawed the whole market. In most countries, though, crypto exchanges simply fall under existing regulatory bodies and remain compliant under these guidelines and standards. Further regulation is often a case of not if but when.
As it pertains to the issue of centralisation vs. decentralisation, regulation is controversial. Nonetheless, though, it is often seen as what will help stabilise the market and help give crypto participants securities beyond those that exchanges, companies, and other individuals give them.
To concentrate on a concrete example: a big part of regulation is based on anti-money laundering. Know Your Customer and Customer Due Diligence are two key parts of this. Adhering to Know Your Customer rules, for instance, government issued I.D.s and address verification must be supplied, meaning no one can use an exchange anonymously. However – to refer back to purist arguments – anonymity is a key part of the cryptocurrency ethos – but KYC is part-and-parcel of US regulation.
It’s a push-and-pull relationship between regulation and crypto. A complicated discourse.
How to Judge an Exchange
Across the market, each exchange has different strengths and weakness. Categorising these gives us a good place to compare options:
- Transaction fees
- Coin availability
Let’s begin with accessibility. It can refer two things: one is the ability for a user to access that crypto exchange and two is the user-friendliness of the exchange itself. To expand on the former, not all countries permit residents to trade cryptocurrencies. Legislation is an ever-shifting landscape so users must be vigilant and familiarise themselves with the latest laws. For the latter, how easy it is for a user to buy and sell assets is fundamental to whether they will do so at that exchange. If it’s difficult, why would they bother?
Security and Storage
Security and storage are intertwined. Exchanges all users to store their coins in their account. For crypto purists, doing this is a no-no as it not only means a user is relying on that exchange’s security practices and solidity but, also, they’re contributing to the centralisation of crypto, consolidating assets in a single third party. The worst-case scenario has been lightly sketched. Hacks and security breaches are a native risk in the largely unregulated crypto world. Sadly, exchanges are often key targets. While looking at trade volume and traffic – and, in the case of some, whether they’re a public company or not – is a good indicator as to which are the most protected, security cannot be guaranteed, just as it can’t be by other companies and businesses. The key difference with exchanges and other businesses, though, is the user’s money tied up in them. As such, many take their coins from the exchange, storing them in cold, non-custodial, hardware wallets. This is done regardless of their trading strategy, whether looking to hold long-term or make quick gains on price movements.
Transaction fees are an inherent part of trading and mining. It’s baked into the ecosystem. In the trading domain, exchanges charge transaction fees based on what coin and quantity a user is buying or selling. Also, they charge based on the features they offer, like if they offer better protections, for instance.
Liquidity and Coin Availability
Finally, liquidity and coin availability come together to form the basis of trading: the more liquidity the exchange has – again, indicated by the size of that exchange – the better they can handle high volume and large transactions; the more coin availability they have means the more likely a user is to find a niche coin.
The Market Leaders
Not all crypto exchanges started out as dedicated crypto exchanges. More globally recognisable names have entered the fray as crypto’s presence in various tech and financial spheres has grown – and along with it demand from those previously unexposed to crypto.
Robinhood and eToro were trading platforms for stocks and ETFs before they both started to accept crypto, primarily Bitcoin and Ethereum – the two leading coins – because expanding. Having previously established their brands in the trading scene, they had an image, an audience, a foundation on which to grow and expand. PayPal followed a similar trajectory, spring-boarding from their existing services into crypto, acting as a hot, custodial, software wallet for users to transfer coins to and from external wallets or exchanges.
Binance, Coinbase, and Kraken are among the biggest crypto exchanges in the world, and all of these began as crypto exchanges. Founded in 2017, Binance’s surge to the top has been notable, with the latter two founded in 2012 and 2011 respectively. Binance’s volume, though, dwarfs that of Coinbase, Kraken, and all its other competitors on a global scale, coupled with Binance’s US-specific version, which sits among the top-10 in terms of volume alone.
However, these exchanges reach these heights from whatever their origins, they will have weaknesses where others have strength. It’s part of the market. While Binance leads the way, it has drawbacks where Coinbase excels, for instance. Below are what we believe the best in important categories for those looking to trade Bitcoin, trade Ethereum, trade whichever coins they see fit for investment: for beginners and for experienced users.
Best for Beginners: Coinbase
Coinbase is a dedicated crypto exchange, as mentioned above, and a publicly traded company. Founded by Fred Ehrsam and Brian Armstrong in 2012, it began life a service to trade Bitcoin through bank transfer. It eventually grew its userbase and focused its investments and acquisitions to securely storing bitcoins. It’s profile hit a during the 2022 Super Bowl – referred to as Crypto Bowl due to the number of crypto-related adverts – in which a $13M advert aired of a colour-changing-QR code bouncing around the screen like the old DVD screensaver. Users were directed to a page which promoted $15 in free Bitcoin and entry into a sweepstake for $1M prizes for Bitcoin. 20 million hits and a jump from number 186 to number 2 in the iOS app store were the results – as was Coinbase’s website crashing.
Coinbase boasts over 100 coins on its platform. All of which are available in the US, in contrast to that of Binance which has a restricted list as it’s US-version is streamlined for regulatory reasons. Users are able to trade Ethereum, Bitcoin, Solana, and Shiba Inu – only a few examples of the major coins they have available – and are adding new coins regularly. Traders will not find many issues with availability or liquidity on Coinbase.
Where Coinbase stands out is in its security practices. While, as mentioned, no exchange nor company can guarantee security, Coinbase is well-insured and is credible.
Another major bonus is that Coinbase stores 98% of its assets in cold storage, making it very, very difficult for hackers and criminals to access. Insurance covers those coins stored in the hot wallet.
Customers are encouraged to use two-factor authentication every time they log-in to her account. It goes without saying that Coinbase adhere to data privacy laws and use encryption. Internally, Coinbase has rigorous practices to ensure employees don’t contribute – knowingly or unknowingly – to any criminal efforts.
The Final Conclusion
For beginners looking to start their journey trading Bitcoin, Ethereum, or other altcoins, Coinbase offers an easy UX to navigate, deposit and withdraw funds, and trade coins. Secondly, its storage capabilities mean that first-timers needn’t worry too much about where they’ll keep their coins until they have a wallet preference.
The only downside is the fees. The structure is only explicitly given before a user completes a trade. It is one of the most expensive options for trading crypto, with Coinbase taking up to 4% depending on how a user deposits or withdraws assets. However, these costs, especially for a beginner, are a healthy compromise for its biggest positives.
Best for Experienced Users: Kraken
Founded in 2011 by Thanh Luu and Jesse Powell, Kraken launched officially in 2013. Now servicing over 7 million users across the globe with availability in 48 US states and 176 countries. A large pool of cryptocurrencies can be invested in with Kraken.
Kraken comes with three tiers, ranging from Starter to Intermediate to Pro. While its Starter tier is helpful for beginners, it doesn’t outshine Coinbase. It’s Intermediate tier can be useful for those pursuing more complex and advanced depths. Largely, though, Kraken stands out at the Pro level.
With advanced features, traders can have more trading variety like futures, margin, and OTC, for instance. Secondly,, there is no limit on transaction volume over a twenty-four-hour period, with a large $10M limit on withdrawals over the same period. Thirdly, transaction fees are cheaper on this level and are based on your 30-day volume on a maker-taker model. All this contributes to the increased control traders can have over their experience, allowing them to operate on the level and depth they wish.
The Final Conclusion
Kraken’s high liquidity and coin availability make it an intriguing exchange option for beginners and experienced traders. While it’s more geared to the latter, the former aren’t ignored thanks to a user-friendly interface and the aforementioned pool of crypto coins to invest in.
Scaling up trading efforts is made easy with the Pro tier and Kraken’s credible security mean those trading at that volume can be comfortable – though, they may utilise non-custodial wallets as they are likely to understand the risks of storing crypto.
The Bottom Line
Crypto exchanges are the gateway, the fundamental means for newbies and veterans to interact with crypto. Their future is directly tied to the future of crypto itself, from use cases to government regulation. The choice of crypto exchanges is vast, though, and beginners and veterans ultimately have plenty of options to choose from to pursue the future of crypto they want, from market leaders like Coinbase to decentralised options like Airswap. Due diligence from users underpins exchanges, of course, as the crypto landscape continues to shift.
Should you always opt for the larger exchanges?
Not necessarily. The benefits of larger exchanges is liquidity, coin availability, and credibility. However, as mentioned, the centralisation issue persists, and smaller exchanges can be credible and fulfil the trading needs a user has.
What wallet options do I have if I don’t want to store assets with the exchange?
Exchanges are custodial wallets, meaning the assets are held by a third party. Non-custodial wallets are ones a user controls.
Hot and cold wallets are separated by internet connectivity: hot are connected, cold aren’t.
Finally, software and hardware distinctions exist. Software ones operate like digital wallets, similar to PayPal. Hardware ones can be compared to USB sticks.
Cold, hardware wallets are often considered the safest.
When looking at decentralised exchanges, what qualities should I look for?
Decentralised exchanges mitigate hacking risks, preserve anonymity/pseudonymity, and limit market manipulation. However, they are more complex to use as there is no third-party making things simpler. Additionally, it’s not possible to trade USD, GBP, or any fiat currency for digital assets, in addition to potential liquidity issues. In short, though, how a user judges a decentralised exchange is similar to a centralised one.