Investing In Crypto Exchanges: A Beginner's Guide To Getting Started

Investing in crypto can be daunting, especially for beginners. The first step is to choose a crypto-trading service or venue, such as a crypto exchange. Crypto exchanges are online platforms where you can buy, sell, and hold cryptocurrencies. They act as intermediaries between buyers and sellers, matching them up and executing trades, usually for a fee.

There are many types of crypto exchanges, each with its own unique features and cryptocurrencies available for trading. Some popular crypto exchanges include Coinbase, Binance, Kraken, and Gemini, which offer a range of cryptocurrencies beyond Bitcoin, such as Ethereum, Litecoin, and Dogecoin.

When choosing a crypto exchange, it is important to consider factors such as fees, cryptocurrency selection, advanced trading options, customer service, and security. It is also essential to understand the risks involved in crypto investing, as it is a highly volatile and speculative market.

Once you have chosen an exchange, you will need to connect your exchange to a payment option, place your order, and ensure the safe storage of your purchased cryptocurrency.

Choosing a crypto exchange

Geographical Location and Restrictions:

Crypto exchanges have varying geographical scopes, so it is crucial to ensure that the exchange is accessible and legal in your country. Some exchanges might be hesitant to accept customers from certain countries due to regulatory issues. For instance, Binance, the largest cryptocurrency exchange, is open to all countries except those on economic and trade sanctions lists.

Security, Anonymity, and Support:

Security is of utmost importance when choosing a crypto exchange, as hacks and scams have resulted in significant losses. Consider exchanges that offer two-factor authentication (2FA), such as Google Authenticator or SMS, and anonymous sign-ups, especially for decentralized exchanges. Additionally, look for exchanges with a good track record of handling security incidents.

Volume and Liquidity:

A large trading volume is usually indicative of an exchange's liquidity, making it easier to fill orders. Centralized exchanges tend to have higher liquidity, making them suitable for trading major cryptocurrencies like Bitcoin and Ethereum. On the other hand, smaller or decentralized exchanges are better for trading smaller coins and ERC20 tokens.

Supported Coins and Tokens:

While most exchanges support popular coins like Bitcoin and Ethereum, consider whether you want to trade other cryptocurrencies. Binance, for instance, offers access to hundreds of coins and tokens, making it a popular choice for those seeking a diverse range of assets.

Fees:

Crypto exchanges charge various fees, including trading fees, withdrawal fees, and account fees. Compare the fee structures of different exchanges, as these can vary significantly. Some exchanges may also offer discounted fees for holding their native tokens or for high-volume traders.

User Interface and Experience:

Choose an exchange with an intuitive and user-friendly interface, especially if you're a beginner. A good user experience also includes easy access to the platform and efficient customer support.

Reputation and Regulatory Compliance:

Opt for exchanges with a solid reputation and a history of adhering to regulatory standards. Check for security measures such as cold storage of funds and regular security audits. Also, consider whether the exchange is licensed to operate in your jurisdiction.

Remember to do your due diligence when selecting a crypto exchange. Research the exchange's history, security measures, supported coins, and user reviews. It is also advisable to use crypto exchanges for trading and purchasing, rather than long-term storage. Consider using a hardware wallet for added security.

Setting up an account

Choose a Crypto Exchange:

First, you need to select a crypto exchange platform that suits your needs. Some popular options include Coinbase, Gemini, Binance, eToro, and Public.com. Consider factors such as security, geographic availability, cryptocurrency selection, educational content, and user-friendliness. It is also important to check the security features and history of data breaches of an exchange. Additionally, ensure that the exchange allows fiat currency transfers and purchases with US dollars, unless you plan to buy crypto using another crypto.

Sign Up and Verify Your Identity:

Once you've chosen an exchange, create an account by providing basic personal information such as your name, email address, and sometimes just a phone number. You will then need to verify your identity, a process known as "Know Your Customer" (KYC). This usually involves providing a scan or photo of a valid government-issued ID, such as a driver's license or passport, and may also include taking a selfie. Some exchanges might ask for additional information, such as your date of birth, Social Security number, and physical address.

Set Up Two-Factor Authentication:

To enhance the security of your account, it is recommended to set up two-factor authentication (2FA). This adds an extra layer of protection, requiring both your password and a code sent to your mobile device or email address to access your account. While some exchanges offer 2FA as optional, it is a valuable safeguard against unauthorized access.

Fund Your Account:

Before you can start trading, you need to fund your account. You can do this by linking your bank account, authorizing a wire transfer, or using a debit or credit card. Bank account transfers are generally the cheapest option but may take several business days to process. Using a credit card can be risky and expensive due to higher interest rates and cash advance fees.

Purchase Your Chosen Cryptocurrency:

With funds in your account, you can now place your first cryptocurrency order. Remember that there are hundreds of cryptocurrencies to choose from, so select the one that aligns with your investment goals. You can enter the ticker symbol of the cryptocurrency you want, such as BTC for Bitcoin, and specify the amount you wish to purchase. Most exchanges allow you to buy fractional shares, enabling you to invest in high-priced tokens without needing to purchase a whole coin.

Connecting a payment method

Choosing a Crypto Wallet

The first step is to select a crypto wallet that suits your needs. A crypto wallet is where you will store your digital currency. There are various types of crypto wallets available, including custodial, non-custodial, hardware, and paper wallets. Each type offers different features and security measures, so it's important to research and choose one that aligns with your specific requirements. Ensure that your chosen wallet provider has enhanced security and improved usability.

Acquiring a Crypto Wallet

Once you've decided on a crypto wallet, it's time to set it up and acquire your digital wallet address. This address will be essential for sending and receiving cryptocurrencies. It is typically a long string of letters and numbers unique to your wallet. You can usually download a wallet from a provider's website or app store.

Selecting a Crypto Exchange

To connect a payment method, you'll need to choose a crypto exchange that allows you to buy and sell cryptocurrencies. These exchanges act as platforms where you can convert fiat currency (such as USD or EUR) into cryptocurrencies. Examples of popular crypto exchanges include Coinbase, Binance, and Kraken. Research their fees, security measures, and supported currencies before making a decision.

Linking Your Bank Account

After choosing a crypto exchange, you will need to link your bank account to the platform. This step may vary depending on the exchange, but it typically involves providing your bank account details, such as account number and routing number. Some exchanges may also offer alternative payment methods, such as credit or debit cards. Ensure that the exchange you choose supports your preferred payment method.

Depositing Funds

Once your bank account is linked, you can deposit funds into your crypto exchange account. This step may be instantaneous or take a few days, depending on the exchange and your bank. During this process, you may also need to select the specific cryptocurrency you wish to purchase, such as Bitcoin or Ethereum.

Buying Cryptocurrency

After depositing funds into your crypto exchange account, you are now ready to buy your chosen cryptocurrency. Carefully review the exchange rates and any associated fees before finalizing your purchase. The purchased cryptocurrency will then be deposited into your crypto wallet, and you will officially own your first digital assets!

By following these steps, you will have successfully connected a payment method to a crypto exchange and entered the world of cryptocurrency investing. Remember to always do your research, stay informed about the latest developments in the crypto space, and only invest what you can afford to lose.

Placing an order

The two most basic types of orders are market orders and limit orders. A market order is an instruction to buy or sell a cryptocurrency immediately at the best available price in the market. It is placed at the top of the pile and executed instantly, making it the simplest and most basic type of order. However, market orders are prone to slippage, where large orders may be filled at a lower price than expected due to insufficient liquidity.

On the other hand, a limit order enables traders to buy or sell a cryptocurrency at a predetermined price. A limit order is placed on the exchange's order book and will only be executed when the market price matches the quoted price. This allows traders to buy or sell at their desired price, preventing them from selling at a loss or buying at an overpriced value. Nonetheless, a limit order does not guarantee that the trade will be executed.

Beyond market and limit orders, there are other order types that help traders minimise losses and maximise profits. Stop-loss orders, for instance, allow traders to control their losses by automatically executing a market order when a specific "stop level" is reached. Take-profit orders, on the other hand, help traders lock in profits by activating a market order when a certain profit price is achieved.

Additionally, there are more advanced order types, such as stop-limit orders and trailing stop orders. A stop-limit order combines a stop order and a limit order, allowing traders to buy or sell a cryptocurrency within a specified price range. Trailing stop orders, on the other hand, move with the market price, allowing traders to secure more gains as long as the market moves in their favour.

When placing an order, it is essential to consider the fees associated with different exchanges and order types. Some exchanges charge higher fees for market orders, while others have complex fee structures that may vary depending on the size of the transaction and the funding source. It is also crucial to assess the risks and volatility associated with crypto trading and to have a comprehensive understanding of the different order types before placing any orders.

Safe storage

When it comes to investing in crypto, one of the most important things to consider is how to store it safely. Cryptocurrency doesn't have the same protections as money in a bank account, and if you lose access to your crypto, it's likely gone forever. It is estimated that 3.7 million Bitcoin have been lost.

There are several options for storing cryptocurrency, including hardware devices, applications, and even a simple piece of paper. Here are some of the most common methods:

Custodial Wallets

Crypto exchanges often provide custodial wallets, where they hold your crypto for you in cold (offline), hot (online), or a combination of both storage. This is a convenient option for those who want to invest in cryptocurrency, as it requires less work on the user's part and is easy to access for trading. However, it's important to remember that you're relying on the exchange's security measures and trusting that they won't lock you out of your account.

Hardware Wallets (Cold Wallets)

Hardware wallets are small physical devices that connect to your computer and store cryptocurrency offline. They are considered one of the safest options for storing crypto, as they are not connected to the internet and are therefore less susceptible to hacks. Popular options include Ledger, Trezor, and SafePal, which offer additional security features such as PIN codes and recovery phrases. While hardware wallets are more secure, they are less convenient for frequent trading as they require more steps to access your funds.

Hot Wallets

Hot wallets are applications that store cryptocurrencies online, often in the form of desktop or mobile apps, or web-based wallets. They give you control over your crypto and are easy to use for quick transactions. However, the major downside is the risk of being hacked. While the odds of this are low, it's a significant risk for those holding large amounts of crypto.

Paper Wallets

Paper wallets are a simple and cost-effective way to store crypto offline. They involve printing out your public and private keys, usually in the form of QR codes, which can then be scanned to make transactions. However, paper wallets are the least user-friendly option and are more susceptible to physical damage or loss.

To ensure the safe storage of your cryptocurrency, it is recommended to use a combination of these methods. For example, you can use a hardware wallet for most of your crypto holdings and a hot wallet for smaller amounts that you want to have readily available for trading. Additionally, always back up your recovery phrases and private keys offline in a secure location.

Frequently asked questions