This article presents a high-level overview of some of the different exchanges on which you can buy cryptocurrencies. Each has its own pros and cons, and it’s important to be familiar with them as you set out to invest.  It also walks you through how to choose an exchange, highlighting factors to consider such as reputation, fees and other important criteria.

Centralized Exchanges

First, let’s talk about the different types of exchanges.  The first and most popular are centralized exchanges which are controlled by a single entity, usually a company. The benefit of this format is that they might be able to help you if you make a mistake since there is a team of real people running it. Plus, they are usually easy to use and can offer advanced functionalities, such as margin trading.

On the other hand, that group of people ultimately control the coins that sit on their exchange. If they wanted to, they can suspend your account and seize your funds immediately. Furthermore, these exchanges are prone to hacks because the funds from every single user sit in a centralized place. There have been many hacks in the relatively short history of crypto, including Mt. Gox and Bitfinex as two of the most well known.

Finally, centralized exchanges have to operate within the regulations of the parent country, so note that your information may be shared with government regulators. Some popular centralized exchanges are Coinbase, Kraken, and Poloniex.

Decentralized Exchanges

Unlike centralized exchanges, decentralized exchanges are not controlled by a central entity, but rather are managed by smart contracts, ie. computer code. The main benefit is that the whole process is trustless – your funds are never held by a third party. Instead, every trade is handled directly by computer code that matches buyers and sellers. These exchanges also do not require you to share any personal information, all you need is your crypto wallet. Finally, the smart contracts that run these exchanges are distributed across the whole network, so there is no risk of downtime in the event of a server failure.

Unfortunately, there are some downsides to these systems. They are certainly not as user-friendly as centralized exchanges, and they do not offer the same advanced instruments that centralized exchanges are able to, like margin trading. Finally, sometimes they have low liquidity, meaning that it can be hard to find someone to take your order. If you are trying to buy a coin, you need a willing seller and vice versa. Without exchange activity, your order may be unfilled for a long period of time, if not indefinitely. Some notable examples of decentralized exchanges are EtherDelta and BitShares.

Fiat to Crypto

Some exchanges let you purchase coins directly with a credit card, ACH bank transfer, SEPA transfer, wire transfer, or other transfer of fiat currency. This means that you can fund your account with the money in your bank account, and then use that balance to buy crypto. These exchanges are usually the quickest and easiest ways to get your hands on some coins. They are also the most straightforward way to cash out; simply sell your coins for the fiat of your choice and deposit that money back into your bank. Usually, the options of coins to purchase via fiat are limited to the most popular cryptos. Because these exchanges deal with credit card companies and banks, they are centralized.

You can also buy coins with cash at a crypto ATM. The vast majority of these are Bitcoin ATMs, and there really are not many yet. At the time of this writing, there are only about 1200 Bitcoin ATMs in the whole US. To use a crypto ATM, you verify your identity and then feed cash into the machine. The ATM will then print you a paper wallet you can use to access your coins whenever you want. You can also withdraw cash by sending coins to the ATM’s wallet address. This is not nearly as fast as using a fiat ATM, because the machines need to wait for a couple confirmations before they release funds. They also typically have high fees compared to online exchanges.

Crypto-Only

Some exchanges only let you trade for coins using other coins. Generally, you have to obtain Bitcoin or Ethereum first, and then transfer your funds to these exchanges in order to trade for other coins. If you were looking to trade Ethereum for XYZ coin, you would look for the XYZ/ETH trading pair and then put in your buy orders for that coin. Popular crypto-only exchanges are Bittrex and Binance.

There are also “instant” crypto trading services such as ShapeShift and Changelly. These have a user-friendly interface and let you exchange a variety of coins quickly and relatively anonymously. Because their services hinge on quick trades, their fees are generally higher than other options.

Over-the-Counter

LocalBitcoins and Paxful are the two major platforms in this category, which allow you to hand-select your buyer or seller. Since transactions are irreversible, over-the-counter trades are especially risky. That’s why these platforms rely on a built-in escrow service and rating system. The process works as follows:

1. Seller posts an ad to sell their Bitcoins, and deposits the coins onto platform.
2. Seller specifies their accepted payment methods and price per Bitcoin.
3. Buyer browses listings and opens a trade with seller.
4. Seller’s funds go to escrow.
5. Buyer pays, seller verifies, and then funds are released to the buyer.
6. Both parties rate each other.

One benefit of over-the-counter trades is that a wide range of payment options might be accepted by a seller, such as Amazon gift cards, Western Union, or even cash in person. However, because sellers are taking a huge risk by selling directly to an individual, prices for coins are generally higher than on other exchanges. Because of this increased risk be sure to follow their guidelines when using these platforms.

How to Choose an Exchange

Now that you have a lay of the land and are familiar with the different types of exchanges, let’s take a look at the criteria you should consider when choosing which exchange to use.

1. Available Coins.  Currently, no cryptocurrency exchange offers access to every single cryptocurrency. Particularly for the less popular ones, you may have to do some digging to figure out where to find them. An easy way to do so is to go to www.coinmarketcap.com and enter your coin of choice into the search bar, and then click on the “Markets” tab. On that page, you will see a list of just some of the exchanges that offer that coin and the trading pairs within that exchange (for example, take a look at Ethereum: https://coinmarketcap.com/currencies/ethereum/#markets). Use that list as a starting point for which exchanges you should consider.
2. Reputation. Just like shopping for anything else, find some reviews online. If an exchange has been getting bad reviews or something seems fishy, maybe reconsider using it. A bad cryptocurrency exchange could potentially mean the loss of your funds, so use at your own risk.
3. Fees. Cryptocurrency Exchanges have different business models, and therefore some require higher fees than others. Before committing your money, look up an exchange’s fee structure and compare it to other options.
4. Payment Methods. You probably have a preference for how you pay for your coins (bank transfer, credit card, PayPal, etc.), and many crypto exchanges only offer a subset of these. Look for an exchange that meets your needs.
5. Verification Requirements. Some exchanges require identity verification, such as sending a picture of your government issued ID, in order to access certain features. This is to increase security and prevent identity theft, but if you are unwilling to do that you may need to look for another option.
6. Location Restrictions. Many exchanges, especially centralized ones, only serve a small number of countries. If you live in a very small country or one with heavy crypto regulations, your options may be limited.
7. Exchange Rate. The price of coins across exchanges may vary greatly (which is what allows for arbitrage). If you have multiple options of exchanges available, you should do some research to see which ones offer better prices. If you are a frequent trader, even small discrepancies can make a big difference in the long run.

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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