There are many different types of exchanges.
What you need to know is that there are essentially four types of cryptocurrency exchange.
- Fiat-Crypto Exchanges
- Crypto-Crypto Exchanges
- Peer-to-Peer Exchanges
Fiat – Crypto Exchanges
These are the exchanges that allow you to buy cryptocurrency directly using your fiat currency (a government currency such as the U.S. dollar or the British pound). These are most popular with those who are unfamiliar with the crypto market, as it allows easy access to the cryptocurrency of their choice without much hassle.
The problem with these exchanges is that they don’t seem to offer a choice of coins, so if all you want is bitcoin, they’re perfect, but for a more specific altcoin.
Crypto – Crypto Exchanges
These exchanges will only let you buy one cryptocurrency using other cryptos. This means that you will need to buy a cryptocurrency on a fiat-crypto exchange, then send it to the crypto-crypto exchange wallet before exchanging the coin you want to buy in the first place.
It is normally for more experienced traders who are actively trading between coins to profit quickly or want to buy smaller and lesser known coins.
Peer-to-peer exchanges are those that simply match a buyer with a seller and will not take the other side of a trade. The most famous example is Localbitcoins, who will match a buyer with a number of sellers (if they’re available), which then gives the buyer the option to choose the best price of the selection.
They will normally offer an escrow service so that there is reduced counterparty risk for both buyer and seller.
Brokerages are not strictly exchanges because they do not allow you to own the underlying cryptocurrency. However, this does have its pluses because you don’t have to go through the hassle of setting up a wallet.