Where you buy crypto

What you'll learn

• What is a Cryptocurrency Exchange?
• Factors to consider in choosing an Exchange
• How an Exchange works
• Different Exchange models

If you’ve read the previous two articles in this section you’ll know what a crypto wallet is, how to set one up and send/receive cryptocurrency. In order to buy cryptocurrency - the next logical step - you’ll need to first create an account with a Cryptocurrency Exchange.

Introducing the Crypto Exchange

Buying cryptocurrency is just like buying foreign currency for a holiday. It is just an exchange of one currency for another at an agreed rate - e.g Euros for BTC (the currency symbol for bitcoin) - which is why the most common place to buy cryptocurrency is called an Exchange. 

It might feel confusing when cryptocurrency like bitcoin is talked about as having a price, whereas for dollar, euro etc we are used to talking about an exchange rate. 

These two terms - price/exchange rate - are interchangeable and simply reflect the fact that currency values - especially crypto - are constantly changing. 

We dive into why that is in our section on Trading, but for this article,it is simply worth knowing that the price of cryptocurrencies like bitcoin doesn’t come from a single source.

The price simply reflects the interaction between buyers and sellers on each Exchange, which organically maintain parity with each other. (again explained in detail elsewhere). An overall representation of price can then be reached by aggregating the price from the main exchanges.

Choosing an Exchange

Given the growing popularity of cryptocurrency there are an increasing number of exchanges to choose from.

You'll find that even the most credible exchanges struggle when demand is particularly intense, so try and plan the process of choosing an exchange, rather than reacting to the next big price rise.

To make that decision easier we have summarised the key criteria and main operators, before providing a walk-through of what the first-time buying process will involve:

Security

Security should always be the uppermost consideration in choosing an exchange. A quick Google search would, for example, establish if an exchange has ever been hacked, experienced significant downtime or has been subject to any legal sanction. 

Aside from the security of the platform itself, look into how seriously they treat customer security and your personal data.

Usability

If you are new to cryptocurrency choose an exchange that is focused specifically on helping you buy for the first time with ease. This means simple layouts and a great mobile experience. 

Avoid exchanges targeted at experienced traders. This should be obvious from their home page, where language should be simple and understandable with a clear focus on first-time buyers.

As you'll see in the next article, exchanges targeted at beginners will boil the buying process down to just a few clicks, just like a normal online purchase process. This removes a lot of the pain of buying crypto, but does compromise on the control you have over the exact price you buy it, and the fees you pay.

Some exchanges cater to both newbies and pros with separate products e.g Coinbase and Coinbase Pro. Make sure you are using the basic service as the Pro site will assume a significant level of understanding.

Fees

An exchange works as  a go-between, matching people who want to buy with people who want to sell; they charge a fee for facilitating the exchange. The size of that fee is calculated as a % of the amount you buy or sell. 

Fees should be a key consideration in your choice if you are intending on making a significant volume of purchases. If you simply want to dip a toe in the water then fees will be less significant.

Choice of cryptocurrencies

If you are buying cryptocurrency for the first time, the likelihood is you are buying bitcoin or ethereum.

Should you, however, have a specific alt coin (alternative coin) in mind, or think it likely you’ll want to diversify, make sure to choose an exchange with a broad enough range of cryptocurrencies. The are literally thousands.

The process exchanges use in adding differing cryptocurrencies varies greatly, so you’ll find a big difference in the availability. If you want to trade a niche crypto, check its availability in advance.

Localisation

One of the biggest factors in your choice should be based on how much the exchange is tailored to your local needs. Is the site translated? Does it provide relevant local payment options? Are there country restrictions specific to where you live?

Trust

Buying cryptocurrency is exciting and empowering, but isn’t without risk. Make sure to use an exchange that is trustworthy. Referrals from friends are a good practice, as is researching on Google, App Stores Social Media and Reddit. Avoid promoted reviews and try to find genuine opinions.

How an Exchange Account works 

Though cryptocurrency itself is decentralised - as explained in our basics of cryptocurrency section - the standard model for exchanges is a centralised one, which is why you’ll see the acronym CEX - Centralised Exchange. 

This is a big point of debate within the crypto community because using a CEX is a custodial option - remember ‘Not your keys, not your coins.’

As part of the process of creating an account with an Exchange you automatically get a web wallet (jump to this article for more information). This is like an online bank account or App where you can check your balance in fiat (Euro/Dollar etc) which hopefully increases over time. 

Any cryptocurrency held in your new exchange wallet is in the custody of the exchange which is why Security should be a huge consideration in the process of choosing an exchange. Ensure you follow best practice for securing your exchange wallet is also crucially important.

Your cryptocurrency exchange wallet will allow you to do the following, which were covered in the previous article in this section:

• Send your crypto to another person/service
• Receive crypto from another person/service

The trading features of your cryptocurrency exchange account will allow you to:

• Buy cryptocurrency
• Convert your crypto for other available currencies
• Sell & Withdraw

All of those are covered in the next article.

Centralised vs Decentralised

As mentioned above, the most common model is a Centralised Exchange (CEX). 

The main reason for this is that in order for an Exchange to sell cryptocurrency, customers need to deposit regular (fiat) money from a bank, credit card or e-wallet - all centralised and regulated financial services. 

For this reason, the majority of exchanges are centralised, regulated businesses, with servers located in specific countries where they abide by the appropriate regulations for financial services. They have visible management teams and 24/7 customer service. In fact you’ll soon be able to buy shares in Coinbase the same as Facebook or Apple.

As already explained, using a CEX also means they custody (look after) your crypto until you decide to move the funds to a non custodial wallet.

For those unwilling to compromise there is another option the DEX (Decentralised Exchange).

As the name suggests, decentralised exchanges aren’t located in any one location and don’t follow a traditional account based approach.

Instead DEXs facilitate access to liquidity (buyers & sellers) via applications that themselves are just smart contracts, with no specific geographic location and therefore, can’t (right now) be subject to any set of regulations around things like KYC.

Using a DEX means you are not only responsible for custody of your funds, but there is a lot more you’ll need to understand in order to buy and sell.

Usability and complexity make DEX’s inappropriate for beginners but even more importantly a DEX is crypto-to-crypto only. If you are a crypto virgin your first purchase will involve you using a fiat payment method meaning a DEX is out of the question.

Person-to-Person Exchange (P2P)

The standard CEX model takes most of the hard work out of buying crypto as you never actually have any idea of who you are buying from. There is, however, an alternative type of exchange where you can interact directly with a seller (or buyer) of cryptocurrency - called P2P (peer-to-peer).

This approach is a bit like eBay, where you can sort vendors by:

• price they are willing buy/sell at
• terms of sale
• their reputation 
  
• the payment methods accepted

The most well-known P2P Exchange is Localbitcoins, available on a country-by-country basis following a regulated, KYC approach. 

As with the DEX, using a service like Localbitcoins isn’t recommended for a first-time buyer simply because the process is too complex.

Not only do you have to actively choose who you want to buy from, you will have to be comfortable sending funds to a trader and then navigating an ESCROW process whereby funds are held until you receive your bitcoin.

P2P exchanges like Localbitcoins provide a valuable service but should only be considered once you’ve got some experience under your belt.

Instead let’s walk through the process of buying from a CEX that is designed for first-time users like you.