Crypto Exchanges: How do They Work?

Crypto Exchanges: How do They Work?

If you want to buy and sell cryptocurrencies, such as Bitcoin or Ethereum, you need to understand what crypto exchanges (cryptocurrency exchanges) are. Digital currencies are traded using crypto exchanges for another type, such as when converting Bitcoin to Litecoin. Crypto exchanges are also the platform traders use to exchange regular money for cryptocurrencies, such as the U.S. dollar.

Similarly, you can sell cryptocurrency you own using crypto exchanges if you want to convert your digital currencies back to regular currencies. You can choose whether to keep your money inside your account or move them to a traditional bank account.

When looking for a good cryptocurrency exchange, it is best to consider your interests and find a platform that can help you reach your goals.

How To Choose The Right Cryptocurrency Exchange


One of the first things you should be considering when choosing a cryptocurrency exchange is how accessible it is for you. You may have difficulties buying and selling specific cryptocurrencies on some platforms because of state or national regulations from where you live.

There are plenty of regulatory uncertainties in the United States that also make it difficult for people to deal with cryptocurrency. Some states have implemented their regulations in controlling and managing digital currencies. New York, for example, requires crypto exchanges to have a BitLicense before they are allowed to operate within the area. Authorities also only allow licensed companies to provide offers of certain approved coins.

While not many other states share the same level of strictness as New York, they still regulate digital currencies and crypto exchanges to a certain extent or are discussing ways to implement new regulations.

Safety and Security

Crypto exchanges that are safe and secure are the best types of platforms to use because they allow you to safeguard your digital assets appropriately. No central institution is responsible for backing cryptocurrency, and holdings are not protected as national currencies stored in banks or traditional investments.

Some cryptocurrency exchanges have implemented various insurance policies to protect their customers' crypto and digital assets from hackers and scammers conducting money laundering. For example, Coinbase created an insurance policy worth $255 million.

That means that if Coinbase's reserves were the target of a hacking attempt or money laundering scheme, account holders could be assured they are protected. This includes any amount of cryptocurrency, up to the specified sum. On the other hand, other crypto exchanges, such as Kraken, utilize their security practices to safeguard their customers instead of using insurance policies.

The security of a cryptocurrency exchange should be your top priority, whether you are looking to store your digital assets for only a short time before moving them into your crypto wallet or for the long term. One of the things you need to look into is how much of the crypto exchange's assets are kept offline in hard storage.

The security of a crypto exchange is becoming an increasingly important factor. As the value of cryptocurrencies goes up, they become an even more attractive target for hackers and thieves. There were a total of 28 attacks targeting some of the best crypto exchanges in 2020 alone. One of the incidents resulted in more than $200 million worth of cryptocurrency being stolen from KuCoin, a Singapore-based crypto exchange.

Keeping digital assets offline is an effective way of protecting cryptocurrencies because it makes it much more difficult for hackers to steal. For example, Coinbase uses this security system by saving 98% of its customers' funds offline or in cold storage, leaving only 2% in active trade status. With this level of security and its $255 million policy, it becomes much safer for customers to trust the crypto exchange with their digital currency.

There are also other security measures, such as two-factor authentication, that you can look for in looking for the best crypto exchanges. This type of measure requires users to input their username and password while also needing additional input, such as a code received by text message, to access the platform each time.

Generally speaking, many people will most likely feel safer and more secure when using the best crypto exchanges that have an existing, large customer base. Conversely, using platforms that do not detail their security measures and offerings is more of a risk and is more commonly seen in smaller or newer crypto exchanges.


While fees are an essential factor to consider, higher fees should not intimidate a user looking for a reliable cryptocurrency exchange. The more accessible a platform makes it for customers to buy cryptocurrency, the higher the fees they will most likely have to pay. A higher fee structure also has the advantage of offering better security and insurance.

While exchange fees may have a fixed price, they are often based on a percentage of the transaction. Some crypto exchanges, such as Cash App, charge varying fees based on the cost of digital currencies. Most fees are deducted on each transaction and can vary on several factors, including whether you are the buyer or the seller. Different digital currencies involved in cryptocurrency trading can also affect the charged fees. Therefore, it would be best to understand every detail of how a crypto exchange platform charges its customers for transactions before trusting them with your assets.


Another essential factor to consider when choosing a crypto exchange is liquidity, or how easy it is for a customer to sell their digital currency when they want. This is another trait that many large-scale crypto exchanges share because their sizes make it easier to have large trade volumes.

Having larger trade volumes also means a higher chance to sell or buy crypto at the best price compared to other exchanges with low trading volumes. The prices of cryptocurrencies are very volatile and change very quickly, which could cause some users to pay a higher price than they would have if they were using popular decentralized exchanges that had large trade volumes.

A helpful site for tracking the price volatility of cryptocurrencies is CoinMarketCap because it follows the trading volume of various crypto exchanges currently in the market when someone chooses to buy crypto. The crypto exchanges list includes Binance, Coinbase, and Huobi, which are the current top exchanges worldwide based on trading volume.

Cryptocurrency Offers

If you only want to buy and sell digital currencies, such as Bitcoin or Ethereum, you should be looking for cryptocurrency exchanges that allow you to trade crypto. Unfortunately, not all platforms allow customers to change every single one of the thousands of cryptocurrencies currently available in the market. While most popular cryptocurrencies can be traded on nearly all crypto exchanges, newer digital currencies, or coins that have a smaller market cap, may only be available on certain crypto exchanges.

However, it would help if you were careful when handling newer or smaller cryptocurrencies as they are more of a risk than more established digital currency, such as Bitcoin.

Educational Tools

Another essential factor to consider when choosing among multiple exchanges is offering educational tools that allow customers to learn about various other coins, digital currency, and blockchain technologies.

Coinbase offers customers rewards when they learn about new digital currency using its Coinbase Earn program. When customers watch videos and complete quizzes related to various coins, the crypto exchange platform rewards them will a small number of coins. These can then be held or converted to another form. Different other crypto exchanges offer customers the chance to learn more about crypto markets, history, and innovations.

Storage Features

When it comes to keeping your cryptocurrencies safe in storage, crypto enthusiasts have varying recommendations. For example, many believe that users should hold their public and private keys with themselves instead of storing them inside their accounts.

But using a crypto exchange can help traders store their cryptocurrencies inside their online account and is a good choice, especially for those just starting in the industry and not used to private keys yet. Later, you can choose to keep your digital assets inside your wallet once you gain more experience in the crypto industry and increase your holdings. However, some experts also warn against using platforms that allow users only to store their cryptocurrency. This restricts your ability to transfer funds if you decide to move your digital currency elsewhere.

Taxes on Digital Currencies

With the growing crypto industry, the tax situation has evolved to include digital assets, making it crucial for any individual investing in crypto to be aware of their tax situation. If you make capital gains on crypto trades, you must report these transactions on your tax return. To do this, you need to know the value of the cryptocurrency you are trading when you buy it using the U.S. dollar and its value when you sell them.

Should You Use Cryptocurrency Exchanges?

While the factors listed above give you a helping hand in understanding what to take note of when choosing a crypto exchange that suits your needs, various other factors can influence your decision. For example, you can also base your choice on your preferences and whether or not you like the platform's mobile version if it has an easy-to-use interface and how its processes work.

But one thing that crypto experts recommend when going into the digital asset industry is that it is best to take some time to learn and understand as much as you can before making a final decision. This ensures that you are sure that the money you invest into cryptocurrency is kept safe.

A good beginner's strategy is looking at the fee structure of a crypto exchange and if you are comfortable with their security measures and systems. You can then look at further steps you need to take when storing your digital assets and your goals for investing in crypto.