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What Is a Crypto Exchange?

Read 6 min
Coins spiraling in a circle
— A crypto exchange allows users to buy, sell and trade their assets.

— While convenient, you don’t own the crypto you keep on exchange, can be limited in what you can do and are leaving its security in their hands.

— Hardware wallets like the Ledger Nano X are the way to enjoy the financial freedom crypto brings securely.

A crypto exchange plays an important role within the world of cryptocurrencies. They allow users to buy, sell and trade their crypto assets in a pretty convenient fashion. However, are they the best way to keep your crypto?

Brief Explanation on Crypto Exchanges

Cryptocurrency exchanges are main staples within the world of cryptocurrencies. They are the most common place to buy and sell cryptocurrencies. Most newcomers will likely have taken their first steps into the wondrous world of crypto through one of these exchanges. Many of the famous cryptocurrency companies like Coinbase, Binance, Changelly, Bittrex and Kraken are in fact exchange platforms. 

Aside from buying and selling cryptocurrencies, they are also often used as a place to store your newly purchased crypto assets, as well as a place for trading your digital assets for another. Let’s take a closer look at each individual service.

The List of Services a Crypto Exchange Provides

Buying cryptocurrencies:

Most crypto exchanges offer global services to purchase a wide variety of digital assets, and often support the most important cryptocurrencies like Bitcoin, Ethereum and XRP. These platforms are a pretty popular spot for those looking to buy their very first cryptocurrencies or engage in strategies like crypto arbitrage. You can use your US Dollars, Euros and many other fiat currencies to buy Bitcoins easily via credit card, PayPal or a bank wire transfer.

Selling cryptocurrencies:

Similar to buying, you can change many crypto currencies back into Euros, Yen or US Dollar with crypto exchanges as well. This’d be done through a bank transfer, meaning you’ll receive your money directly on your bank account. 

Storing your crypto assets:

Once you bought your Bitcoin on an exchange, they will store your newly purchased BTC through their platform. Your portfolio is usually shown in a user-friendly manner and easily accessible. It’s pretty convenient for users to keep their crypto on these platforms: they’re easy to access and very few actions are needed to send your crypto. However, this does come with some serious risks and limitations – more on this later.

Trading crypto assets:

Exchanges also provide an easy way to trade one cryptocurrency for another. Many expert traders use exchange platforms to try and profit from the rapid price movements that cryptocurrencies tend to undergo. Websites like Coinmarketcap can be a great tool for this as well, as they show information such as price changes, as well as the rank and total market cap of a crypto currency.

Getting Started

Starting your crypto journey through an exchange is usually pretty easy, allowing everyone aboard the “crypto train”. Let’s go over the steps.

Step 1: Account creation

Before you start your journey on an exchange, you’ll need to create an account with the crypto exchange of your choice. Usually this means giving your e-mail address and setting a password, though some exchanges allow you to use your phone number too. After this, you’ll need to give some personal information such as your first and last name, date of birth etc.

Step 2: Account validation

Your account is now created, but you won’t be able to make any purchases or trades just yet. Act 2 of your account creation is its validation. In this process, you’ll likely need to undergo a Know Your Customer (KYC) process where you have to provide personal information, often including a photo of your passport or ID. After this, the crypto exchange will verify your identity.

Step 3: Buying crypto

Congratulations, your account is now validated! You can now start your very own crypto adventure by buying your desired cryptocurrencies via credit card or a wire transfer. You can also send transactions to the wallet addresses your exchange provides in order to start trading them or sell them.

Exchanges tend to charge a fee for each of these three services, meaning they’ll take a cut from every buy, sell and trade order you place through their platform. These fees are one of the main ways they make their profit.

When choosing your preferred exchange, it’s important to do your fair share of research beforehand. It’s often considered best to pick a crypto exchange that has built a fair reputation and boasts a high level of liquidity.

Crypto Exchanges Are Convenient but Limit Your Freedom

Exchanges provide quite a few important features through their platform in a usually very user-friendly experience. It’s no wonder that many users leave their beloved crypto assets on an exchange, since their interface is very easy to use and convenient. Owning crypto through exchanges is pretty simple.

Except you don’t own that crypto on your account.

Remember how the exchange helps you to conveniently keep your crypto? Well the thing is, you aren’t in charge of it. You do not have total control over your own crypto, nor the freedom to do with it what you want – the exchange does. 

This is why the exchange can set certain limits to your crypto activities. For example, they can set a minimum or maximum withdrawal limit. This also means that if they’re having a service disruption, you won’t have any way to access your crypto assets.

This is due to you not owning your private key. The one in charge of this key has full control over the funds on the address it links to. When you buy your coins online through exchanges, they own your private key – not you. This is where the famous crypto expression Not your Keys, Not your Coins comes from. 

A Real Crypto Exchange Concern: Security

Not having complete control over your money and the freedom to use it the way you want to is far from ideal. On top of this, you don’t have any control over the security of your hard-earned crypto – which is more relevant than you might think.

While you can make sure that your account is pretty well secured by using a complex password and two-factor authentication (2FA), you still have no control over how secure the platform itself is.

Cryptocurrency exchanges are an ideal target for hackers because of the huge amount of crypto they can steal – and they’ve been successful more often than we’d like. Devastating hacks like the iconic MtGox hack back in 2014 ($460 million stolen) have happened too many times these past years, often grabbing media headlines. Crypto exchanges have stepped up since and quite a few added insurance to their platform. That said, big exchange hacks still happen multiple times per year, with the $150 million hack of KuCoin being a recent example. 

Your Secure Road to Freedom

Let’s get one thing straight first: Exchanges are great at what they do best – allowing you to buy, sell and trade your crypto. However, they aren’t meant for long-term storage and tend to limit what you can do with your digital assets. Owning your own private keys gives you absolute freedom over your own crypto. 

Hardware wallets are the way to securely control your own crypto. Ledger’s hardware wallets use the most secure chips to store your private keys offline. 

Combining our devices with the Ledger Live app gives you a secure and convenient path to financial independence and freedom. We’ve recently even added one of the most used crypto exchange features: the possibility of buying crypto with our partner. The game changer is that your crypto immediately gets sent to an address you fully and securely control. And there are more features on the horizon…

Ps. Did you know that you can buy your Ledger hardware wallet with cryptocurrencies? You can use Pay as a payment method for this.

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video 3 Ways to Earn Passive Income from Crypto

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