How does a cryptocurrency exchange work?
When it comes to investing in cryptocurrency, there’s no better way to get started than through a recognized exchange online. And part of this is because, exchanges form an important component of the entire crypto ecosystem.
However, before delving in, it’s always a good idea to understand how the process works including what cryptocurrency exchange is. Common questions newcomers usually ask include how an exchange works, the risks involved when trading and other basic enquiries.
The purpose of this article is to help you understand what a cryptocurrency exchange is and also give you a general view of how it works. So without wasting any more time, let’s start with the basics.
What is a cryptocurrency exchange?
As the name indicates, a cryptocurrency exchange is essentially a marketplace online where people come to purchase or sell digital currencies. It acts as an intermediary between traders allowing them to either buy or sell fiat money or digital assets for Bitcoin, Ethereum, and other cryptocurrencies. In other words, you may view an exchange as a crypto reserve for trading pairs.
Pairs may be fiat like the US dollar, or crypto like Ethereum and Bitcoin.
While many exchanges only support the trading of crypto pairs, there are few that allows trading both cryptocurrencies and fiat money. It is common to come across pairs like USD/BTC and BTC/USD on exchanges that support different kinds of digital assets. However, crypto based exchanges are likely to offer pairs such as BTC/ETH, ETH/BTC, BTC/LTC, and so on.
It is important to choose a reliable and trusted exchange when you want to buy Bitcoin or other cryptocurrency. To learn more about all different aspects offered and find out the which is the best exchange for your need you can have a look at Cryptimi.com, where you can find the list of the best cryptocurrency exchanges and the best crypto wallets where to keep your coins safe.
So how does a cryptocurrency exchange work?
The rate or price of cryptocurrencies are basically determined by currency exchanges. This is usually after monitoring the action of sellers and buyers and taking certain factors into consideration such as market demand and supply, total amount of coins or tokens in circulation, political events, volatility and time.
There are different types of exchanges with different functions and options. There are some that are basically designed for prompt fiat-cryptocurrency (and vice versa) exchange, and there are others that mainly focused on crypto investors and traders. The major difference between both platforms is that trader-focused exchanges offer lower commission to dealers when they buy and sell cryptocurrency. They also charge fees for withdrawals.
From the explanation above, it’s obvious a crypto exchange work in a similar way like a traditional stock exchange. The only difference being what is traded and how profit is generated.
Here’s a simple run down of the process:
- You register with an exchange, then deposit a certain amount of digital currency or fiat money. Of course, the deposited currency must be supported by the exchange and above a certain minimum imposed by the platform.
- Next the exchange (usually software) matches the buying and selling orders, often known as bids and asks respectively.
- For example, if you are a buyer and you want to buy bitcoin, you can set the maximum price you want to purchase one bitcoin. In the same manner, if you are seller, you can set the minimum amount you want to sell one bitcoin. If a bid is greater than an ask, then the exchange will match both of them and the deal pulls through.
The major goal of cryptocurrency traders is to make profit from the changing rates of currencies.
Whether you plan to trade fiat or crypto, it’s important to note the order in which the currencies are paired because their value tends to increase or decrease with time. Of course this depends on various variables.
For instance, you can purchase a BTC/USD pair is you think the BTC will increase against the dollar or a USD/BTC pair if you think the dollar will gain a higher value rank against Bitcoin. This prediction will be subject to the market economy in the near future.
Getting started
To start trading online, you need to open an account with an exchange and then buy some cryptocurrency. If you are trading on exchange that accept fiat money, then you can transfer an initial amount in USD or any other fiat currency (usually via check, PayPal or credit cards). However, since most exchanges only support coins as the domestic currency, you may need to buy from the exchange.
Margin trading is also allowed by most cryptocurrency exchange for people who do not have enough money to trade. However, this is usually conditional and may influence how much you lose or gain.