2.2.0. Cryptocurrency Exchanges
As mentioned earlier, one characteristic feature of a cryptocurrency is that it is Peer-to-Peer (P2P). That is, it does not require a middleman to send or receive the digital money.
Let’s say you want to buy some amount of Bitcoin but do not know anyone who is willing to sell to you, how will you be able to locate a seller? The obvious thing is to google and search for a seller. That will be a bit of a challenge. Won’t it?
To resolve such a challenge, some people set up digital platforms where the buyer and the seller of a cryptocurrency can meet and do their transactions. Such a digital platform is called a Cryptocurrency Exchange.
Note the following Four Important Facts about a Crypto Exchange:
(1). Anybody can set up a cryptocurrency exchange. In fact, as at the writing of this manuscript, there are about 400 centralised crypto exchanges in the Crypto Market. This means someone can set up a crypto exchange to scam people of their money.
(2). In most countries, cryptocurrency exchanges are required to register with government authorities in order to operate legally in that country. Therefore, a safe cryptocurrency exchange is one that has registered with the necessary government authority.
(3). A cryptocurrency exchange acts more like a cryptocurrency bank by allowing users to open cryptocurrency accounts with them just like you open bank accounts with physical banks.
Note that it is usually free to open such a cryptocurrency account. Therefore, be careful with any cryptocurrency exchange that requires you to pay a fee to open an account with them.
(4). Most cryptocurrency exchanges will provide cryptocurrency accounts with inbuilt wallets. This means as you open a cryptocurrency account with a crypto exchange, your account will be provided with crypto wallets in which you will keep your cryptos.
Hence, before you open an account with a cryptocurrency exchange, always find out if the exchange also provides crypto wallets.
2.2.1. Custodial and Non-Custodial Wallets
Do you still remember the difference between public and private keys of a crypto wallet mentioned above? Depending on who is keeping the private key, a crypto wallet is said to be custodial or non-custodial.
• Custodial Wallet
This is when the private key is held by the cryptocurrency exchange. That is, when you open an account with a cryptocurrency exchange, the exchange will open a cryptocurrency wallet for you, give you the public key (wallet address) but keep the private key of the wallet with them.
In such a situation, it is not your responsibility to safeguard the private key but that of the crypto exchange.
This is why before you open an account with any cryptocurrency exchange, ascertain whether they are legit and have a good reputation. Remember, your private key is the gateway to your digital money!
• Non-Custodial Wallet
However, not all cryptocurrency exchanges keep the private keys of digital wallets with them. Some exchanges will allow the users of the wallets to keep their private keys. Such a wallet in which you are responsible for your private key is called a Non-Custodial Wallet.
Since the crypto exchange does not keep the private keys of non-custodial wallets, it means it is your obligation to keep safe the private keys of the wallets.
Again, remember, your private key is the gateway to your digital money!
Non-custodial wallets are becoming popular in the Crypto Market due to the rise of decentralised cryptocurrency exchanges. You will learn how to set up and use non-custodial wallets in Tertiary School of Cryptocurrencies.
2.2.2. Fiat Exchanges versus Non-Fiat Exchanges
By now you know that a cryptocurrency exchange is where the seller and the buyer meet to transact on cryptocurrencies.
For you to be able to buy, sell, send, or receive a cryptocurrency, you will need to convert your fiat money such as Dollars, Naira, or Rands to a cryptocurrency.
Not all exchanges accept fiat currencies. Those exchanges that do not accept fiat currencies are called Non-Fiat Exchanges while those that do accept fiats are called Fiat Exchanges.
Interestingly, some popular global financial merchants like Visa and Mastercard have started to add crypto wallets to their credit and debit services. Meaning, you should be able to use your fiat money to buy cryptos via these merchants.