Trading cryptocurrencies is easier and less complicated than you think. However, it isn’t a walk in the park either, You need to know what is a cryptocurrency exchange. Here’s an introductory article to the world of cryptocurrency exchange; read on to learn what you need to get started in trading major cryptos such as Bitcoin, Ethereum, Litecoin, and more.
What is a Cryptocurrency Exchange Explained
If you’re not a merchant who accepts crypto as a form of payment or a miner, you can still get in on the lucrative cryptocurrency world thanks to the exchanges. What’s a cryptocurrency exchange? These are essentially online marketplaces where you can purchase or sell cryptocurrency coins using either altcoins or traditional (fiat) currencies, such as USD, GBP, EURO, JPX, etc.
Put otherwise, a crypto exchange is a digital platform that acts as a go-between between those interested in buying or selling cryptocurrencies. There are two broad categories of cryptocurrency exchanges: centralized and peer-to-peer exchanges.
Peer to Peer Currency Exchanges
Also called decentralized exchanges, P2P currency exchanges cut out the intermediary by involving a smart “trustless environment.” The trades in this kind of exchange are made through atomic swaps and smart contracts. This way, P2P exchanges make sure that money doesn’t go through escrow accounts; it’s purely peer-to-peer trading.
Benefits of P2P Currency Exchanges
While most cryptocurrency exchanges operate autonomously, they are still vulnerable to government control. The good thing is that decentralized exchanges cannot be clamped down by governments because there’s no single point of authority.
People who act as go-betweens run traditional (centralized) exchanges. Of course, they don’t do charity work; you’ve to shell out money to pay for their services. P2P exchanges run on open-source software that calls for little to no overhead costs.
P2P exchanges don’t actually hold your cryptocurrency or private keys to its address. Instead, they bridge the gap so that buyers and sellers of cryptocurrency can do business without much hassle.
The decentralized nature of P2P exchanges makes sure that no government or third-parties can meddle with trades or identity of the involved parties.
Does P2P cryptocurrency exchanges come with any downsides? One most significant disadvantage is that trades take longer in these exchanges. They also suffer from reduced liquidity.
These are typical cryptocurrency exchanges that act as intermediaries between sellers and buyers of crypto coins. A buyer can obtain cryptocurrency by exchanging it with either a fiat currency or another cryptocurrency, often referred to as altcoin. In other words, a centralized exchange can be seen as the digital marketplace for the entire crypto network.
Are there benefits of trading at centralized exchanges? Yes, they offer speedier transactions. You see, the presence of an intermediary makes the whole process snappier. That is because a single authority is in charge of the trades.
Which Exchanges Provide Fiat Currency/ Cryptocurrency Pairing?
Not all crypto exchanges are created equal. Some offer both fiat-to-crypto pairing (eg, trading $18,000 for 1 BTC) and cryptocurrency-to-cryptocurrency pairing (eg, trading 9ETH for 1BTC). While all of them offer crypto-to-crypto exchanges, others don’t provide fiat currency-to-crypto pairing.
How does a Cryptocurrency Exchange Work?
Cryptocurrency exchanges simply match sellers with buyers. And, just like conventional stock exchanges, traders have a choice of buying and selling crypto by placing either a limit order or a market order. When a limit order is set, the trader is authorizing the platform to exchange his/her coins for a price above the current bid or below the current ask, depending if he or she is selling or buying.
On the other hand, when a market order is set, the trader is telling the exchange to trade the cryptos for the best available bid on the platform.
First, the user has to register an account with the platform and go through a raft of verification questions. Once set up, the exchange often designates the user as either a taker or a maker. For a limit order, the platform adds the request to its order book until a bid that matches it is found on the other end.
It’s also crucial to note that all cryptocurrency exchanges attract transaction fees which are often applied to every fulfilled sell or buy order. Of course, the transaction fees vary from one exchange platform to another.
Examples of Cryptocurrency Exchanges
Binance: founded in 2017, the platform is based out of China and allows fiat/crypto pairing. Others include Gemini, Coinbase, Kraken, Robinhood, Bittrex, Upbit, GDAX, and Bitfinex, just to name a few.