Note that we refer to types of exchanges based on their main financial products. Some companies that specialize in providing exchange services often have a variety of products that make it hard to put them in a specific category. For example, Binance is one of the most popular cryptocurrency exchanges visited by millions of investors daily. This platform offers its clients a spot market section, margin accounts, and even P2P trading.
What is a cryptocurrency exchange?
Digital assets must be traded between users to maintain their value. If you cannot use them, their value is only determined by your perception of them. Cryptocurrency exchanges are online platforms where users can find a trade.
There are several main types of exchanges that a retail trader may encounter:
- Centralized exchanges. CEX platforms are corporate entities that offer financial services and, generally, take your money and assets into custody. It is expected from a user to make a deposit and conduct their business strictly within the platform instead of finalizing deals between two parties with barely any oversight.
- Decentralized cryptocurrency exchanges. DeFi is a powerful concept that made many contemporary crypto projects stand out. These platforms may use special mechanisms to take your assets in custody but usually operate as online services where users can trade directly with automated or manual supervision.
- P2P exchanges. Peer-to-peer trading is a common way of swapping assets with other investors. However, it works well in the cryptocurrency domain due to a variety of reasons. P2P exchanges allow users to stay anonymous if they so choose and keep prices low to attract business. The first exchange platforms were P2P and focused on matching investors instead of providing a complete financial service.
- Derivative trading platforms. As various cryptocurrencies were gaining traction in the financial world, many companies decided to start offering derivatives like futures and perpetual futures. These investment instruments can be quite volatile and often require retail traders to use leverage. Only CEX platforms offer these products to their clients.
- Cryptocurrency retailers. While not exchanges in the traditional sense of the word, vendors that allow users to buy and sell cryptocurrencies for fiat also can be used to make money and build up a portfolio. Note that it is not recommended to keep your crypto on such platforms.
How does a cryptocurrency exchange work?
An exchange is an online platform that offers a wide range of financial services to its clients. Some of the most advanced companies even have specialized investment products that cater to specific types of investors who want to work with crypto.
Whenever you need to buy or sell a token, you must go to a place where other traders gather. With more traders, you will have access to higher liquidity and trading volumes meaning that retail traders tend to flock to the biggest exchanges in the world and move large quantities of assets at a time. An exchange is like a big forum for retail traders. It is a moderated online environment where users can trade safely and avoid scammers.
Depending on the type of exchange, you may be required to open a deposit or move your funds to an escrow account. The vast majority of crypto users prefer the first method since the latter demands some technical expertise. In essence, a cryptocurrency exchange is a place where retail traders meet to swap their assets.
How do crypto exchanges make money?
The main source of revenue for these companies is collecting commissions and fees. Some exchange platforms provide their services for free or at a heavy discount to attract users and sell their tokens. This strategy rarely works out. It is much better to run a honest transparent business and earn your revenue by providing a great service.
There are several main monetization schemes employed by crypto exchanges:
- Collecting a flat fee for escrow services. This method is usually used by decentralized or P2P platforms where users negotiate independently from the platform and have to finalize deals outside of the platform. To ensure that both parties walk away happy, exchanges offer escrow accounts and protect buyers and sellers.
- Collecting commissions on deals. Centralized exchanges have small fees that range from 0.01% to 2% depending on the platform. Sellers or buyers, or both, are subjected to these commissions. Exchanges rely on their clients to continue trading to generate revenue. It is an honest system respected by many retail traders.
- Offering leverage. When you deal with certain digital assets and derivatives, you may need financial support when attempting to open some market positions. When you don’t have the money, an exchange will happily provide it for a fee. Margin accounts are quite popular among all traders who want to make money by trading.
Exchanges may also offer complementary services, products, and investment plans that generate revenue, but commissions for their middleman services usually comprise the bulk of the company’s income.
How many cryptocurrency exchanges are there?
It is hard to tell the exact number of CEX, P2P, and DEX platforms that offer their services to retail traders interested in working with crypto. Since each nation has a variety of local exchanges and some obscure platforms are used only by tight communities, counting them is a tedious and, honestly, useless task.
About a hundred large companies offer their services to international investors. Most of them operate from offshore destinations and some are registered in countries where they conduct business for the most part.
Here are some of the most popular exchanges and some information about them. These companies are listed in no particular order:
- Binance. This is the biggest centralized cryptocurrency exchange in the world with an estimated market share of close to 17% which is massive. Binance has national subsidiaries but operates primarily in Japan and France. Their current HQ is listed in the Cayman Islands. The company offers an impressive lineup of financial products to millions of its customers.
- Kraken is a US-based centralized cryptocurrency exchange that caters to US and Canadian audiences. The platform is evaluated at $10.8 billion, but the valuation is quite volatile and depends on a plethora of factors at any given moment. The list of the products offered by this company may seem limited, but it is a reliable platform with thousands of regular users.
- KuCoin is a popular international platform that has offices in over 200 countries. The main focus of the company is on providing an excellent exchange service where users can safely trade their digital assets across borders. The platform is one of the best in terms of technological integration and has a powerful API allowing retail traders to automate their investment endeavors.
- OKX offers a wide range of different services and products including P2P trading, margin accounts, derivative trading, staking, and more. It is a great destination for users who are interested in diversifying their crypto investments and finding exciting ways to work with various digital assets.
All of these platforms can be considered CEX and P2P platforms. You can also buy cryptocurrencies without much hassle using their apps making them some of the best crypto retailers out there. Note that the world of cryptocurrencies is incredibly large and you don’t have to limit yourself only to the most popular places. Choose the right platform based on your preferences and requirements.
Let’s talk about the different types of these companies.
Type 1. Centralized exchanges
While the vast majority of crypto enthusiasts are strongly against any form of centralization, the truth is that the community has to give up some aspects of decentralization to ensure the safety of participants. We cannot hope that everyone will become a technology expert or never make a mistake. Centralization is required when it comes to trading between humans.
What is a centralized exchange?
A centralized exchange is a corporate entity that offers services within its platform and takes your assets into custody. It is usually controlled by a board of directors or a single individual. While the latter scenario could be quite dangerous and prone to failure, when it is run by a team of capable managers, a centralized exchange can be a great place to conduct any business related to crypto.
Here’s a list of centralized crypto exchanges that you should be aware of:
- Binance. One of the biggest exchanges in the world with a global corporate presence and a wide range of various financial products.
- KuCoin is another international cryptocurrency exchange that regularly appears on various rankings thanks to its reliability.
- Bittrex is a technologically advanced platform that offers its clients access to a rich variety of financial crypto products.
- Coinbase operates primarily within the US territory. It is one of the oldest crypto exchanges that now offers an expanded lineup of products.
- Kraken. It is to create a good list of CEX platforms without mentioning Kraken, an outstanding cryptocurrency exchange used by thousands of users.
CEX platforms have multiple benefits that many retail traders find quite appealing. While they might be vulnerable to various risks, they also provide convenience. Take a look at some of the CEX advantages:
- Ease of use. You don’t need to learn new technical skills or interface layouts. Centralized exchanges work like traditional brokerage services providers.
- Trading simplification. Instead of trying to find a suitable order and talk with another party, you can go to the spot market and trade instantly without any additional hassles.
- Safety. Users of centralized exchanges are not exposed to various risks related to dealing with unfamiliar traders who may scam you or otherwise compromise your deal.
Centralized exchanges are by far the most popular choice among retail traders who want to explore the world of cryptocurrencies. Many newcomers do not even know about other options and start trading immediately without exploring decentralized exchanges.
Type 2. What is a decentralized crypto exchange?
A decentralized Bitcoin exchange is an online platform that operates like a brokerage service provider but usually doesn’t take your assets in custody or otherwise improve anonymity and privacy. The main disadvantage of this approach is that it has two critical vulnerabilities:
- Technology. Decentralized exchanges are often deployed on blockchain by initially independent developers and issues with the code are, unfortunately, common. Problems with safety, functionality, and efficiency plague the whole DeFi space. Just remember that some decentralized platforms use tech that may fail and you won’t have any central authority to complain to.
- Speed. Decentralized exchanges are noticeably slower compared to centralized entities that usually conduct business without using exclusively smart contracts and on-chain transactions. The decrease in speed compared to CEX platforms is marginal, but it can be a turn-off for some retail traders who would like their orders to be processed instantly.
Let’s explore a short list of decentralized exchanges:
- Uniswap is an established decentralized platform for people who want to swap their digital assets effortlessly and for a low price. The platform saw massive growth during the period following the FTX debacle and continues to expand its business.
- The Curve is another hugely popular platform with a large catalog of unique financial products and services. It is the second-largest DEX platform in the market by trading volume and has enormous potential for future growth.
- Pancakeswap is probably the most famous and recognizable brand in the domain of decentralized trading platforms. The native token of the platform has been a staple for crypto investors who wanted to venture into the DeFi space.
Type 3. Peer-to-peer exchanges
P2P is the main form of trading employed by true enthusiasts. How do Bitcoin exchanges work when only two parties are involved? P2P platforms do not provide specialized financial services and don’t take your assets into custody. You go to such platforms to seek other individuals who want to trade their digital assets.
Peer-to-peer means that two parties interact directly without any third parties involved. While this approach can be quite dangerous without any supervision, it is also one of the best ways to conduct business if you are concerned with anonymity and privacy. Instead of using a middleman, you can trade with a buyer or seller directly.
Some P2P platforms provide a certain level of protection to their clients by offering escrow services. They have special accounts where digital assets are held in custody until both parties agree to terms and finalize their parts of the trade. It is a good compromise and usually costs less than a commission on a centralized exchange.
There are many advantages to using P2P platforms. The registration process is simplified so that you don’t have to provide any sensitive personal information if you don’t want to. While the functionality is limited and you will have lower chances of finding a good deal, it is still an option chosen by some diehard Bitcoin enthusiasts.
There are many places where you can trade cryptocurrency. Here is a P2P cryptocurrency exchange list:
- Binance P2P. This trading space is safe and reliable. The trading volume is high despite it being a strictly peer-to-peer part of the platform. Note that you need to provide some personal information to the exchange since the main platform is still a centralized entity.
- Bisq is a fully decentralized trading platform specializing in peer-to-peer swaps. It is a well-established brand that has been around for a while. The interface is quite friendly and allows newcomers to quickly get used to working with cryptocurrencies.
- Hodl Hodl is another P2P platform that does not try to be something that it isn’t. You will find a simple list of available trade offers or can create one of your own. The platform offers escrow services and ranks traders based on their trustworthiness and trading volume.
Type 4. Exchanges where you can trade derivatives
Cryptocurrencies are still highly speculative digital assets. It means that the value is determined by supply and demand. Many factors that define the value of traditional financial instruments simply do not apply to crypto. For example, tokens do not represent physical manufacturing sites or real capital investments.
Speculative assets tend to encourage financial institutions to create instruments that benefit from volatility and market fluctuations. Futures are great examples of such instruments. Speculators and advanced investors enjoy working with these derivatives.
Many exchanges offer their clients futures trading. Many retail traders believe that trading futures on Bitcoin to work with exchanges that provide leverage is the best way to make money quickly. It is true, but one must remember that using leverage is quite dangerous and can ruin your financial well-being in a couple of bad trades.
Below is a centralized cryptocurrency exchange list with companies that offer derivative trading:
- Binance is the largest CEX platform by trading volume where futures and perpetual futures represent a solid chunk of their overall revenue. You can use leverage on good terms. The company offers a wide range of complimentary services and other derivatives to work with.
- Kraken offers its clients a rich variety of derivatives to work with. It is one of the biggest CEX platforms in the world. If you are interested in trading futures on BTC or any other token, you should check out this famous trading platform.
- Interactive Brokers IBKR is a highly specialized brokerage service provider that works with futures and perpetual futures while offering leverage at a low price. While not the biggest platform in the market, it is still an interesting option to explore if you want to trade derivatives.
Type 5. Cryptocurrency retailers
This option is not for those who are interested in making money by trading or want to have a dynamic portfolio full of promising digital assets. Crypto retailing is buying and selling tokens using the services of a vendor. Another way of understanding the term is a company that offers its goods and services in exchange for Bitcoin or Ethereum.
Crypto retailers are quite common in many countries of the world. Japan and South Korea have many specialized companies that sell and buy crypto from citizens while complying with national regulations. You can use smartphone apps and even outdoor vending machines to buy crypto.
This particular way of working with crypto caters to people who want to try using digital money or want to simply create a piggy bank filled with tokens. PayPal and CashApp are among the companies that offer their clients ways to exchange fiat money for crypto.
The main takeaway
Many different types of crypto exchanges exist in the crypto industry. Choosing the right option is a necessary step toward building a strong portfolio and efficiently exploring the world of crypto. It is a good idea to try several platforms before committing to any investment plan involving digital assets and other novel financial instruments. As always, do your research and make informed decisions.
