Exchanges And Brokers For Bitcoin And Other Cryptocurrencies
A cryptocurrency exchange is a digital trading platform where cryptocurrencies can be exchanged or bought with fiat currencies (Euro, Dollar, etc.). As simple as this definition is, the various exchanges can be very different. There are now a large number of exchanges that make trading with cryptocurrencies possible.
What exactly is a Crypto Exchange?
They are often also called „Brokers“, depending on their background. They can also be compared to stock exchanges. They are platforms where buyers and sellers of cryptocurrencies can meet and trade with each other. Unlike a stock exchange, for example the New York Stock Exchange / WallStreet, they are not a physical place.
In the early days of cryptos, Bitcoin was exchanged through forums or other networks where people traded directly with each other. Today, most people prefer the stock exchanges. Not only do the platforms offer more security, they also automate processes and help to find exchange partners faster. On the stock exchanges an enormous trading volume is generated every day. Therefore their data is used to calculate the price of a cryptocurrency.
Besides individual differences, such as the fees, the cryptocurrencies offered, which fiat currencies are accepted, there are a few significant differences that determine the way in which digital currencies are traded on the platform:
Stock Exchange / Broker
Stock exchanges usually focus on trading various cryptocurrencies, comparable to the stock exchange. In the meantime, however, some providers also offer buying and selling crypto with fiat currencies.
Peer-to-Peer Stock Exchange
This refers to websites that primarily provide a platform for buyers and sellers to trade cryptocurrencies with each other. The website only provides the platform and helps with matchmaking. Buyers and sellers must agree on the price for buying and selling themselves. The exchange charges a fee for providing the platform.
This is a platform where the buyer or seller deals directly with the operator of the site itself. Trading takes place at a price previously set by the platform, which is based on current prices. There is also a fee here.
As the name suggests, they are all about decentralization. They do not keep the customers‘ money on one platform, but enable decentralized peer-to-peer transactions directly between the users, in the spirit of cryptocurrencies.
How does an Exchange for Cryptocurrencies work?
The details may differ depending on the exchange. But the first step is to register. While the registration itself is usually very simple – an e-mail address or mobile phone number for confirmation is often sufficient – the verification of the account is often more complicated. Verification is all about identifying yourself as a real person.
This is done by sending a copy of your passport, proof of residence or a statement of account. In this way, the platforms want to make it more difficult for criminals and also comply with the guidelines of the supervisory authorities. These are „anti-money-laundering“ (AML) and „know-your-customer“ (KYC) guidelines. Even though the process may be cumbersome, it increases the seriousness of the stock market.
The next step is to deposit money on the platform. Either the fiat currency from the bank account or the cryptocurrency from the wallet. Only when there is money on the deposit, can trading be done.
Then requests and orders can be placed. The exchange looks for the right partners and initiates trading. If a transaction comes about, a fee is deducted. This also includes the „miner’s fee“. This is the fee that the block chain of the respective cryptocurrency charges for the transaction.
In this case, algorithms and bots ensure that the trading partners find each other and a trade takes place. They match requests and offers with each other and carry out the transactions between the two depots on their own.
Are Crypto Brokers and Exchanges Secure?
Every now and then, news of stock exchange hacks shake the crypto world and question the seriousness of the operators. In fact, hackers are constantly trying to gain access to the many exchanges and steal the money stored on them. The stealing of cryptocurrencies is becoming more and more the focus of hackers.
However, this is not because the stock exchanges are so easy to hack. There is only much more to be gained from a successful attack. Nevertheless, the stock exchanges are not fundamentally dangerous. There are large crypto exchanges and brokers that could never be cracked. Hackers have never achieved to steal funds from major Bitcoin broker BitMEX. The operators make every effort to protect the accounts of their users and, in the event of an attack, to close the security holes as quickly as possible.
As an individual, there is something basic you can do to protect yourself: Get your own wallet, such as the ledger Nano S (field report), to keep your cryptocurrencies safe there. The security of your own wallet is not automatically higher than that of the stock exchange. That depends entirely on the wallet you choose.
However, a single person is a far less lucrative target than a whole wallet with thousands of users. Cryptos that you do not want to trade with in the foreseeable future should rather be taken off the platform and stored on your own wallet.
What is there to consider?
Apart from taking your own crypto currencies off the crypto exchange for security reasons (for larger investments), there are a few things to consider:
The fees can vary considerably. A fee of 1% is already considered quite high, most fees are lower. The „makers“, i.e. those who place offers to sell on the stock exchange, often pay lower fees because they provide liquidity. In addition, fees can be charged for withdrawing funds. Here you have to be careful not to fall for hidden costs.
Not only which cryptocurrencies are offered can be important, but also the trading pairs. Sometimes certain cryptocurrencies can only be exchanged for Bitcoin, Ethereum or Tether. Not on all exchanges it is possible to buy a cryptocurrency with Euro or Dollar.
Stock exchanges that are subject to the regulations of supervisory authorities like the SEC in the US or the FCA in Britain are often reputable and trustworthy. This is not to say that stock exchanges that are not supervised by a regulatory body are automatically bad. Exchanges that only allow crypto-to-crypto swapping are often not supervised by any regulator because there is no fiat money involved.
If you want to deposit with Euro, Dollar or other fiat currencies, you have to pay attention to which payment methods are accepted. German stock exchanges often accept bank transfers and payment service providers that are common in Germany.
Inform yourself calmly on the Internet about the experiences that other users have already made with a platform. Have credits suddenly disappeared? Was it hacked often? What about support?
The trade and sale of cryptocurrencies is taxable under certain conditions. In our article on taxes and crypto-currencies you will find everything you need to know.