What is a cryptocurrency exchange and how to choose it

A cryptocurrency exchange is a platform where you can buy and sell crypto. You can exchange some coins for others or buy them in exchange for fiat, i.e. real, money. For example, you can convert bitcoins into lightcoins, pay for them with $ or withdraw crypto in cash.

The exchange also shows the current market prices of the cryptocurrencies they offer. And they offer other services. For example, stacking, when you freeze a certain amount of digital coins in your wallet to make sure the blockchain works.

Tyrone Ross, financial advisor and CEO of Onramp Invest, believes: There is no one crypto exchange that will satisfy every user. Instead, you need to understand exactly what you are looking for and find a cryptocurrency exchange that meets your needs.

For example, are you looking for some specific coin or do you want to find step-by-step instructions for beginners? In each of these cases, you may choose different exchanges. But there are some general requirements that exchanges must meet. Here’s what you should pay attention to:

  • Accessibility. The exchange must operate legally and accept the currency you are comfortable paying with. Information on this can be found on the site.
  • Security. Since crypto is not backed by any central institution, your assets on an exchange are not protected, unlike money in a bank or traditional investments. To protect your money, some exchanges have insurance policies against hacking or fraud. Each exchange has its own ways of providing security, which you should find out about in advance.
  • Transaction fees. Don’t chase low rates. Spencer Montgomery, founder of Uinta Crypto Consulting, thinks: the easier it is to buy or sell crypto on an exchange, the higher the commission will be. An even higher commission is possible if the exchange insures users’ assets. That way you pay for the safety of your own funds. Different platforms have different conditions. Most often it is a percentage of the amount, but sometimes the commission can be fixed.
  • Liquidity. An exchange must have enough trading volume to allow you to buy or sell crypto at any time. Often the more popular exchanges have the highest trading volumes.
  • Coins that are available on the exchange. Bitcoin or Ethereum can be found on any exchange. But if you are looking for less popular coins, they are not everywhere.
  • Tutorials. For newbies, it’s best to choose exchanges that have detailed tutorials, videos, podcasts, or other materials about cryptocurrency.
  • Where your assets are stored. You can store keys to your cryptocurrency assets online on an exchange or on a “cold” wallet, that is, a special USB drive. Tyrone Ross cautions against exchanges that only allow coins to be stored on their platform. Although this option will suit beginners who are just learning.

How to earn on a cryptocurrency exchange

There are several ways to make money on the exchange:

  • Hodl. You buy a certain cryptocurrency and wait for its price to rise.
  • Stacking. You lock a certain amount in your wallet, meaning you can’t use it. These coins are used to validate transactions to create a new block in the blockchain. You get a percentage for this.
  • Farming. You put money in a liquidity pool or lend it to others. For that, you get a percentage of the transaction fees of that pool.
  • Cryptocurrency trading. This involves first buying certain coins and then exchanging them for others. This way, you will earn on the difference in rates of the cryptocurrencies. Since crypto is very unstable, trading is a risky strategy.
  • To make money trading crypto, you must have a good understanding of how it works and have analytical skills. Trading is more suitable for those who already have experience with digital coins. For example, made long-term investments.
  • Depending on which strategy you choose, you can trade on your own or with the help of a trading bot. They are designed for routine work. Based on artificial intelligence, they analyze information about the price of crypto and place buy or sell orders on your behalf depending on the situation.

How to trade on a cryptocurrency exchange

Here are some strategies for trading cryptocurrency.

  • High-frequency trading is a technique where you can make dozens of trades per second. It is only possible when using a special bot. It monitors the market and continuously makes trades while it is connected to the exchange.
  • Scalping is a strategy in which you make a small profit on a large number of trades. The more trades you make, the more you earn. Scalping uses many different coins to take advantage of small price changes over a short period of time. Usually this happens within a few minutes, but sometimes it can take as long as a few seconds or hours.
  • Range trading is based on the assumption that cryptocurrency prices will fluctuate within a certain range over a certain period. It is believed that if the price moves outside of this range, its value will soon change dramatically.
  • Technical analysis examines how the value of an asset and the size of the trade have changed over a certain period of time. It assumes: the market has already incorporated all known information into the cryptocurrency’s current price and sales volumes. This is how traders predict trends and make buying decisions.
  • News and sentiment analysis is similar to technical analysis. But there is one difference: it is based on predicting human actions and reactions, not on price trends. By analyzing news and sentiment from various sources of information, one tries to anticipate whether demand for a particular cryptocurrency will fall or rise. Sources can be industry news, social media posts by influential people, and so on.