What are Cryptocurrency Exchanges?

91

Let’s say you are about to begin your cryptocurrency journey. So, you’re looking for your first tender. You have done complete research on the tokens you’re interested in and have decided to buy the one. 

Now that you want to buy a cryptocurrency, have you thought of how or where to buy it?

The answer to both how and where is through cryptocurrency exchanges. 

If you have no idea about these crypto exchanges, then you have landed on the correct page. Let’s begin from scratch.

What are cryptocurrency exchanges? 

You can consider the cryptocurrency exchanges as the cryptocurrency’s version of the stock exchange. It means the buyers and sellers trade different assets on a platform. These assets have their value based on the current market prices. In these cryptocurrency exchanges, you can perform fiat-to-crypto transactions as well as crypto-to-crypto trading.

For example, consider a South-African based exchange Coindirect where you can buy Bitcoin with South African Rand or Euro or can trade their Bitcoin for Ripple’s XRP. There are hundreds of exchanges available in the market today. The most popular exchange is the Binance and GDAX exchange.

Always make a note that cryptocurrency exchanges are not the same as crypto wallets or wallet brokerages. These wallets allow you to buy and sell a small range of popular digital assets. Then, you can send them to a different exchange to trade for other altcoins.

There are some cryptocurrency exchanges which limit their users to only trade digital assets for digital assets. Also, there are a few exchanges which allow the trading 

 This statement is not entirely exclusive though; most cryptocurrency exchanges will usually limit their users to only trade digital assets for digital assets, but a few allow trading of fiat currencies such as U.S. Dollars for cryptocurrencies. 

One example of such an exchange is the Kraken exchange. This exchange accepts funds in the form of USD, JPY, CAD, and GBP. It also supports trading with Monero, Ripple, and Litecoin as well as Bitcoin and Ethereum.

Now, that you have a brief idea about what is a cryptocurrency exchange, let’s understand how it works.

How do cryptocurrency exchanges work?

Crypto exchanges set up a rate for both coins and tokens. This rate depends on the actions of buyers and sellers. Various crypto exchanges have various options and functions. Some of these options are for traders and some others are for the prompt crypto-fiat exchange.

Crypto exchanges for regular traders allows you to buy crypto and sell them with lower commission fees than on crypto-to-fiat exchanges. If you want to withdraw money from the account, then these trading platforms will charge a certain amount of fees.

Cryptocurrency exchanges work similarly to regular stock exchanges. The only difference is that in stock exchanges, traders can buy and sell assets, shares, or derivatives to gain profit from their changing rates. In crypto exchanges, traders will use cryptocurrency pairs to gain profits from highly volatile currency rates.

Types of Cryptocurrency Exchanges

There are three types of cryptocurrency exchanges:-

Traditional Cryptocurrency Exchanges

These exchanges are similar to stock exchanges where the buyers and sellers trade on the current cryptocurrency prices. For every transaction, these trading platforms charge a fee. Some of these exchanges deal only in cryptocurrencies and others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin.

Brokers

These are website-based exchanges like the currency exchanges at an airport. A broker will set a price that allows customers to buy and sell cryptocurrencies. This exchange deals with the buyer or seller and the broker, and not between a buyer and a seller.

Direct Trading

They offer peer-to-peer trading between buyers and sellers. This type of exchange doesn’t use a fixed market price. Sellers will set their own exchange rates. Buyers will either find sellers via this platform or they denote the rates they want to buy for and the platform that will match the buyers and sellers. There are many decentralized Exchanges of this type.

How to choose a cryptocurrency exchange? 

While choosing a cryptocurrency exchange, you may want it to support specific altcoins, trading pairs, and additional features such as margin trading or over-the-counter (OTC) deals. Once the basic requirements are met by the exchange, you need to check other aspects as well:

Security

Security is an important factor of an exchange. If the exchange does not ensure security, then your funds may be stolen. Although it may offer various other advantages, the exchange is worthless.

Technology

  • The web address of the exchange should start with HTTPS. Avoid those with HTTP connections.
  • The exchange should use two-factor authentication for login safety. 
  • The customer’s deposits should be stored in cold storage. 

Legal Aspects

  • It is always better to use an exchange from the same country as you are. It is because of the varying crypto regulations in all the countries. 
  • There are a few exchanges that may insure your funds. It means that if you lose your funds, you may be reimbursed.

Transparency

Check if the exchange reveals its owners, headquarter address and the members of its team. There are exchanges which publish their cold storage address or help check their reserves in other ways, like audit information.

Liquidity

The liquidity of an exchange depends on the amount of trading volume. Liquidity helps in faster and easier transaction completion without the need to deal with price volatility . Also, check whether the exchange offers “locked-in” pricing. Liquidity can be different for different trading pairs.

Fees

Always compare the fees charged by the exchange. Usually, it is less than 1% per transaction. It may also decrease if the trading volume increases. Check the withdrawal fees of the exchange as some of the exchanges offer unreasonable high withdrawal fees for specific altcoins. Check the deposit fees too.

Final Word

The newbies in cryptocurrency trading will require an exchange. So, to begin trading on the exchange you have to ensure that you have all the ideas about the cryptocurrency exchanges. Always choose wisely.