Common Questions About Cryptocurrency Exchanges
What is a Crypto Exchange?
A crypto exchange is essentially a platform where you can buy and sell cryptocurrencies using cash or other digital assets.
This guide focuses mainly on centralized exchanges. A centralized exchange is managed by a business entity that facilitates buying, selling, and transactions of cryptocurrency. If you’re new to cryptocurrency or need to convert fiat currency to crypto, you’ll likely use a centralized exchange.
Another type of exchange is a decentralized exchange, which operates through automated, blockchain-based programs. These allow users to swap different cryptocurrencies directly. While decentralized exchanges often have lower transaction costs, they require more technical knowledge and are limited if you don’t already own cryptocurrency.
What Services Do Crypto Exchanges Offer?
Beyond facilitating crypto purchases and sales, exchanges offer additional services. Some provide rewards for lending your crypto. Many also offer to hold your crypto for you, eliminating the need to set up your own wallet.
However, some exchanges have faced issues with these additional services, such as freezing withdrawals from rewards programs due to liquidity problems. Storing crypto in an exchange’s wallet also poses risks, as you could lose your assets if the exchange fails or gets hacked.
How Much Money Do I Need to Use a Crypto Exchange?
You don’t need to invest a lot to get started with crypto. Most crypto exchanges reviewed by NerdWallet don’t have account minimums, so you can create an account and explore without spending any money. When you decide to buy crypto, you can start with a small amount, as many exchanges have a minimum purchase requirement of just a few dollars.
How is Investing in Crypto Different from Investing in Stocks?
Investing in cryptocurrencies differs from traditional stock investing in several ways:
- Higher Fees: Cryptocurrency trading typically incurs higher fees compared to traditional stock trading, which has seen a decline in fees. For instance, trading Bitcoin can involve fees of 5% or more, while most online brokers no longer charge commissions for stock trades.
- Customer Service: The crypto industry is still developing, and customer service often lags behind traditional brokerages. Many crypto exchanges don’t offer customer support, making it difficult to get help with account issues.
- Security Responsibility: With crypto, you have greater responsibility for protecting your assets. While exchanges offer protection against site-wide hacks, you’re not covered against individual attacks, such as phishing scams where you might inadvertently reveal your passwords.
By understanding these differences and the services offered by exchanges, you can make more informed decisions about your crypto investments.