What is a cryptocurrency exchange?
Cryptocurrency can be sent without the intervention of third parties, like a bank. If you want to find another person who wants to trade Bitcoin with you against another coin, this can be quite difficult. Luckily, this is the reason exchanges have been brought to life. A cryptocurrency exchange brings crypto buyers and crypto sellers together on one platform. Buyers and sellers can determine the price themselves. When the amounts match, the exchange performs the trade and the trade is definitive. On an exchange supply and demand are brought together and you pay trading fees, these costs vary between 0.05% and 0.25% per transaction.
Examples of popular exchanges are:
What are the disadvantages of an exchange?
There are multiple disadvantages to an exchange. Exchanges are very vulnerable for hacks, because there is simply a lot of money available to steal. Hackers are actively trying to hack exchanges. In 2019, Binance, Bithumb and DragonEx have been hacked. The question remains whether these exchanges have enough liquidity to pay back the lost funds to their users.
Besides, you should know that you are never the official owner of the (digital) wallet on an exchange. You don’t manage the private keys yourself. That is why you depend on the security of the exchange.
The exchange does not add anything to the idea of Bitcoin. Normally speaking, it is a central company with a profit motive. They have a lot of influence on the market and it takes the decentralized character of Bitcoin away. Luckily, the future is bright and decentralized exchanges, with the option to manage your own private keys, are coming.
What is the difference between an exchange and a broker?
This is a frequently asked question by our visitors. As said earlier, an exchange searches for a buyer and a seller. A broker, on the other hand, only sells cryptocurrency and buys it back from you. Simply said, they place an order on an exchange, add fees on top of this and sell it to the customer. The advantage of a broker is that you can often buy Bitcoin with easy payment methods. Bitvavo, for example, is both a broker and an exchange, they charge a maximum fee of 0.25%.