Different Types of Crypto Exchanges

Published by Madhuri Walia on

Crypto Exchange

The crypto market which initially started with Bitcoin is now worth more than $450 billion. Around 40% of trade is done in bitcoins and other emerging cryptocurrencies occupy the rest of the market. Now in order to do trade, you need an established marketplace. In the case of cryptocurrencies, there are many online platforms available for trading. The cryptos are exchanged with other cryptos or fiat currencies.

The crypto exchanges can be classified on the basis of

  1. Nature of Transaction
  2. Nature of Trading Platform

On the basis of the nature of transaction there are following four types of exchanges:

#1 Fiat to Crypto Exchanges

Here you can exchange the fiat money (such as US Dollars, British Pound, etc.) with cryptocurrencies (such as Bitcoin, etc.) or vice versa. However, it has been seen that it’s easy to exchange bitcoin and not all other types of cryptocurrencies with fiat. Bitcoin is the most popular crypto which can be bought using fiat money. After buying this popular one, you can exchange it with your preferred crypto either on the same exchange or on a different one. You can buy cryptos using your VISA/Master card or bank account. Few examples are Coinbase, Changelly, Coinmama, CEX, etc.

Because of tough regulations, this type of exchanges is finding it tough to sustain in the market. Recently, Indian exchange Coindelta announced their termination of services because of high maintenance costs.

The new entries in the crypto space mostly prefer buying with the fiat money because of its hassle-free nature.

#2 Crypto to Crypto Exchanges

Here you can swap one crypto for another. It is a direct way of getting your crypto exchanged for another crypto. The order is placed with the exchange for buying the crypto. Once the seller for the same is found, the transaction is completed. Few examples of such exchanges are Poloniex, Bitstamp, Coinbase, KuCoin, Bittrex, Binance, etc.

Coinbase recently started allowing cross border payments. So if you are a Coinbase user, you can send funds to another Coinbase user easily. That too, there is no fee, if you are using Ripple or Coinbase’s stable coin USDC.

The latest technology uses the concept of atomic swapping where the order gets fulfilled instantly even if the match (buyer/seller) is not found.

#3 Peer to Peer Exchanges

The online trading platform is the only middle entity involved in the trade between the buyer and the seller. The famous example is Localbitcoins. It will find different sellers for the buyer who can then select the one offering the best price.

The peer to peer exchanges offers escrow service which almost nullifies the risk for both the buyers and sellers.

#4 Brokers

Someone else (the brokerage company) does trade on your behalf. So you don’t own the underlying asset nor do you need to know the technicalities involved in trading. The company keeps the difference as its profit i.e. brokerage fees.

One advantage is that you are not exposed to the risk which is involved with exchanges. But still there is a risk involved in such type of dealing because they are not regulated and brokers follow the rules of the regulatory body with which they have a license. Few examples are eToro, 24 Option.

On the basis of the nature of the trading platform, there are following two types of exchanges:

#1 Centralized Exchanges

The structure of a centralized exchange is similar to that of a stock exchange. There is a buyer, seller, and a middleman. You give your money to the middleman which is the exchange itself. This middleman finds the suitable buyer/seller as per your order of buying/selling.

You can exchange either cryptos for cryptos or fiat for cryptos. Not all exchanges provide the facility of exchanging fiat with cryptos or the other way. Coinbase, Kraken, Gemini, Bittrex, and Robinhood are the few providing such a facility.

Binance, Huobi, KuCoin, Bitfinex offer only crypto/crypto exchange.

#2 Decentralized Exchanges

The idea of cryptocurrency was that the people should be able to manage their own funds and with centralized exchanges, this is not possible. Therefore, the decentralized exchanges came into existence where there is no involvement of a middleman.

The buyers and sellers find themselves and exchange funds. It is similar to peer to peer trading and there is no risk of security hacks. However, the liquidity of such exchanges is less mostly because very few are aware of the technicalities of trading and find it difficult to trade on their own. Some examples are IDEX, Waves DEX, Stellar DEX, Bisq DEX.

#3 Hybrid Exchanges

These are the next generation crypto exchange platform where you get the benefit of both centralized and decentralized exchanges. The liquidity is high with the ease of trading and at the same time, you get a private and secure environment to carry out your trade. Example- Qurrex.

Recently there is this new type of exchange which is kind of membership based platform, mostly focusing institutional traders. San Juan Mercantile Exchange is one such exchange in Puerto Rico which got its new venture San Juan Mercantile Bank & Trust International to carry out banking operations for its customers. Now the users can efficiently carry out their trades.

Final Words

There are a number of different crypto exchanges for you to choose from. Each has its own pros and cons. You can choose according to your requirement. But remember to chose wisely because a wrong choice means loss of funds.

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