Our Top Picks for the Best Crypto Exchanges

• Coinbase - Best for Beginners
• Binance.US - Best for Low Fees
• Crypto.com - Best for Security
• BlockFi - Best for Earning Interest

Crypto Exchanges Guide

Despite having broken into the mainstream, crypto can still be a confusing subject for investors of all levels. How exactly do they work? What are the different types of exchange and how do they differ from crypto wallets? Read our guide to understand the ins and outs of cryptocurrency exchanges.

What is a crypto exchange?

Crypto exchanges are platforms where users can trade digital currencies for other assets, including cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and regular currencies, like U.S. Dollars and Euros.

Exchanges are an essential part of the crypto ecosystem because most traditional investment firms do not offer cryptocurrencies in their portfolios. Without exchanges, you would have to find another person willing to trade crypto and agree at an exchange rate. Then, you would have to send the coins directly to each other's cryptocurrency wallets - a somewhat convoluted process.

Crypto wallet vs exchange

Crypto wallets and exchanges are both essential tools used to manage cryptocurrencies. Wallets are meant to keep your crypto funds safe, whereas exchanges are trading hubs where users convert fiat currencies to digital ones and buy or sell crypto based on current market rates.

Many crypto exchanges operate their own wallets, so users can start trading crypto as soon as they open their account without having to worry about getting a digital wallet of their own. These are known as web-hosted wallets, and their incorporated exchange is responsible for their security measures.

Serious traders are encouraged to keep an independent cryptocurrency wallet to deposit any coins they aren't actively trading. This is because you could lose all your digital assets if the exchange is hacked.

Although you'll be responsible for securing, backing up, and managing your own funds, independent digital wallets are a much safer alternative for safeguarding the bulk of your crypto.

How do crypto exchanges work

The way crypto exchanges work depends on their type of platform. Most crypto trading platforms are known as centralized exchanges, which function as a brokerage, acting as intermediaries between buyers and sellers.

Users can deposit money into exchanges to buy cryptocurrency or deposit their own crypto to trade for other currencies, known as crypto-to-crypto spot trading. Traders can expect to pay a fee for converting one crypto to another, like when exchanging regular currencies at a bank (for example, converting USD to EUR).

In exchange for digital currencies, exchanges may accept a wide variety of payments, including credit card payments, direct bank transfers, credit or debit cards, money orders and even gift cards.

Dedicated crypto and bitcoin exchanges will allow you to withdraw your crypto funds and transfer them to another wallet of your choice. Others, especially those that focus on other assets, like stocks and ETFs - including Robinhood and eToro - only let you purchase the crypto but not transfer it out of their web wallets.

What are the different types of crypto exchanges?

Crypto exchanges come in three varieties: centralized, decentralized, and hybrid.

Centralized exchanges (CEX)

Centralized exchanges are the most common and traditional type of crypto exchange. These are owned by private companies and offer investors a platform to trade cryptocurrencies. This type of exchange tends to have higher trade volumes and liquidity and a greater number of trading pairs.

Centralized exchanges are often considered a good option for new crypto traders because of their better onboarding and user interface, availability of customer support, and insurance should the platform's systems fail.

Examples: Binance, Coinbase, Kraken, Gemini 

Decentralized exchanges (DEX)

Decentralized exchanges follow in the spirit of Bitcoin by operating with no central point of control. Servers for this type of exchange are spread throughout computers located across the world, which means if one computer is attacked, the network keeps running. This alone entices many users who fear losing their crypto due to a security flaw in a company's trading platform.

Where centralized exchanges operate as brokerages, decentralized exchanges are more like marketplaces. They facilitate peer-to-peer trading and have a less rigid registration process. The main drawbacks of decentralized exchanges include lower trading volume, small liquidity, generally poor user interface, and a lack of customer support.

Examples: Bisq, Uniswap, PancakeSwap, Tokenlon, dYdX

Hybrid exchanges

Hybrid exchanges are part of a new generation of crypto trading platforms whose goal is to provide the best of both worlds. They aim to overcome the limitations of older exchanges by offering the greater functionality and liquidity of centralized exchanges together with the security advantages of decentralized exchanges.

Hybrid exchanges boast fast transaction speeds without compromising their users' privacy but are still a relatively new development in the crypto world. Time will tell if they will be successful or struggle due to high costs, limited scalability and limited assets.

Examples: Nash, Qurrex, Eidoo, Legolas

Understanding crypto exchange fees

Crypto exchanges charge several fees, and it's not always clear what exactly you'll be charged for.

There are two main types of fees to look out for: exchange fees and network fees.

Exchange fees are how crypto exchanges make money. In other words, they're service fees that include:

• Trading fees, charged when making transactions and are also called "maker/taker" fees. Trading fees indicate whether a crypto order provides liquidity to the market or not. These also apply when converting currencies.

• Deposit fees, charged when users add money to their account, usually via debit card, credit card, or PayPal instead of through a wire transfer.

• Withdrawal fees, charged when withdrawing regular currency or cryptocurrencies from your account.

• Account fees, charged on a regular basis, usually monthly.

Network fees are paid to cryptocurrency miners, who process and secure crypto transactions on the blockchain. Many centralized crypto exchanges incur this cost, though some may allow their users to pay more in miner fees to speed up transaction speeds. Users on decentralized exchanges generally have to pay this themselves, since there is no third party between them and the crypto miners.

What to look for when choosing a crypto exchange

When choosing a crypto exchange, the main things to look for are functionality and security measures. Your exchange of choice should have most, if not all, of the features you expect to use, be it fiat-to-currency trade pairings, liquidity aggregation, or specific altcoins and stablecoins you want to trade. It should also provide additional lines of defense, such as two-factor authentication and Bitcoin locks, which help against hackers.

Ease of use is another factor to consider and is especially important for newer traders who may struggle to use platforms with a less intuitive user interface. Nonetheless, advanced traders can also benefit from greater usability.

It's also important to consider geography. Not all exchanges are available in the USA, some only operate in certain states.

How to be sure a crypto exchange is legitimate and secure

When looking for a crypto exchange, it's essential to keep an eye out for fake websites and mobile apps. Even if the platform seems legitimate, make sure to check for any misspellings in the copy, inauthentic branding, and, in the case of a website, whether there's a small lock icon indicating security near the URL bar.

Likewise, it's important to remind yourself that scams aside, trading crypto can be dangerous. Cryptocurrencies are highly volatile, meaning that they are subject to sudden increases and decreases in values that even the wisest investors cannot predict with certainty.

Financial advisors recommend that if you invest in cryptocurrency, practice caution and keep it below 5% of your total investments.