What is
cryptocurrency exchange?
Cryptocurrency
exchanges are platforms that facilitate the trading of cryptocurrencies for other
assets, including digital and fiat currencies. In effect, cryptocurrency
exchanges act as an intermediary between a buyer and a seller and make money
through commissions and transaction fees.
A crypto exchange is a platform on which you can buy
and sell cryptocurrency. You can use exchanges to trade one crypto for another
— converting Bitcoin to Litecoin, for example — or to buy crypto using regular
currency, like the U.S. Dollar. Exchanges reflect current market prices of the
cryptocurrencies they offer. You can also convert cryptocurrencies back into
the U.S. Dollar or another currency on an exchange, to leave as cash within
your account (if you want to trade back into crypto later) or withdraw to your
regular bank account.
If you're wondering where to buy cryptocurrency, using a cryptocurrency exchange platform is likely where you'll start your investment journey This is why crypto exchanges are in such a need in this industry. They allow them to buy, sell and trade their cryptocurrencies instantly, some of them serve as the fiat gateways as well, so you can even use your bank account or credit card to purchase some cryptocurrency assets.
The classic process of cryptocurrency exchanges is
focused on trading similar to a stock exchange. With your fiat money or another
crypto, you can exchange your assets by placing a limit order that would go to
an orderbook and wait there until matched or by placing a market order that
would be instantly matched with buyers and sellers requests already available
in the exchange's depth of market (DOM).
Centralized vs. Decentralized Cryptocurrency Exchanges
Centralized cryptocurrency exchanges
act as a third-party between a buyer and a seller. Since they are operated and
controlled by a company, centralized exchanges offer more reliability.
Approximately 99% of all crypto transactions go through centralized exchanges.
Examples of centralized cryptocurrency exchanges include: Coinbase, GDAX, Kraken,
Gemini
Decentralized cryptocurrency exchanges
(DEX) allow users to execute peer-to-peer transactions without the need for a
third party or an intermediary. Due to some of the issues associated with
centralized exchanges, decentralized exchanges are preferred by some users.
However, decentralized exchanges do not
facilitate the trading of fiat currencies for cryptocurrencies. Examples of
decentralized cryptocurrency exchanges include: AirSwap, Io, Barterdex, Blocknet
Advantages of
Centralized Cryptocurrency Exchanges
1. User-friendly
Centralized
exchanges offer beginner investors a familiar, friendly way of trading and investing
in cryptocurrencies. As opposed to using crypto wallets and peer-to-peer
transactions, which can be complex, users of centralized exchanges can log into
their accounts, view their account
balances,
and make transactions through applications and websites.
2. Reliable
Centralized
exchanges offer an extra layer of security and reliability when it comes to
transactions and trading. By facilitating the transaction through a developed,
centralized platform, centralized exchanges offer higher levels of comfort.
Disadvantages
of Centralized Cryptocurrency Exchanges
1. Hacking risk
Centralized
exchanges are operated by companies that are responsible for the holdings of
their customers. Large exchanges usually hold billions of dollars’ worth of
bitcoin, making them a target for hackers and theft.
An example of
such an incident is Mt.Gox, which was once the world’s largest cryptocurrency
exchange company before it reported the theft of 850,000 bitcoins, leading to
its suspension.
2. Transaction fees
Unlike
peer-to-peer transactions, centralized exchanges often charge high transaction
fees for their services and convenience, which can be especially high when
trading in large amounts.
Advantages of
Decentralized Cryptocurrency Exchanges
1. Mitigating hacking
risk
Users of
decentralized exchanges do not need to transfer their assets to a third party.
Therefore, there is no risk of a company or organization being hacked, and
users are assured of greater safety from hacking and theft.
2. Preventing market
manipulation
Due to their
nature of allowing for the peer-to-peer exchange of cryptocurrencies,
decentralized exchanges prevent market manipulation, protecting users from fake
trading and wash trading.
3. Anonymity
Decentralized
exchanges do not require customers to fill out know-your-customer (KYC) forms, offering
privacy and anonymity to users.
Disadvantages
of Decentralized Cryptocurrency Exchanges
1. Complexity
Users of
decentralized exchanges must remember the keys and passwords to their crypto
wallets, or their assets are lost forever and cannot be recovered. They require
the user to learn and get familiar with the platform and the process, unlike
centralized exchanges, which offer a more convenient and user-friendly process.
2. Lack of fiat
payments
Decentralized
exchanges do not allow for the trading of fiat currencies for digital ones,
making them less convenient for users that do not already hold
cryptocurrencies.
3. Liquidity
struggles
Some 99% of
crypto transactions are facilitated by centralized exchanges, which suggests
that they are accountable for the majority of the trading volume. Due to the lack of volume, decentralized exchanges often
lack liquidity, and it can be difficult to find buyers and sellers when trading
volumes are low.
How does a
cryptocurrency exchange work?
With a centralized exchange, the process is basically the reverse of buying. But one advantage if you own crypto is that you probably already have everything set up. Here are the steps:
A crypto exchange is a marketplace where you can buy
and sell cryptocurrencies, like Bitcoin, Ether or Dogecoin. Cryptocurrency
exchanges work a lot like other trading platforms that you may be familiar
with. They provide you with accounts where you can create different order types
to buy, sell and speculate in the crypto market.
Exchanges work similarly to a broker, giving you the
tools to buy and sell cryptocurrencies like Bitcoin, Ethereum, and Tether. The
best cryptocurrency exchanges make it easy to buy and sell the currencies you
want with low fees and strong security features. This type of exchange is not
limited to cryptocurrencies, p2p exchanges are very popular in the traditional
markets as well. Its representatives are Over-the-counter desks (OTC), where
you buy or sell an asset from some other individuals or companies, but
confidentially. There is no order book and no direct effect on the price of the
underlying asset. A typical example in the crypto sphere is the website
LocalBitcoins.com, where supply meets demand in the meaning, they trade peer to
peer. Mostly without a middleman, but some OTC trading desks might be used as
well, where they charge fees for the mediation. OTC serves primarily for large
amounts of crypto, which might have affected the price of the traded asset.
Typically, it is used by large venture capital companies, hedge funds, and last
but not least, for the cryptocurrency miners.
This type of exchange is not limited to
cryptocurrencies, p2p exchanges are very popular in the traditional markets as
well. Its representatives are Over-the-counter desks (OTC), where you buy or
sell an asset from some other individuals or companies, but confidentially.
There is no order book and no direct effect on the price of the underlying
asset. A typical example in the crypto sphere is the website LocalBitcoins.com,
where supply meets demand in the meaning, they trade peer to peer. Mostly
without a middleman, but some OTC trading desks might be used as well, where
they charge fees for the mediation. OTC serves primarily for large amounts of
crypto, which might have affected the price of the traded asset. Typically, it
is used by large venture capital companies, hedge funds, and last but not
least, for the cryptocurrency miners.
What are the
benefits of using a cryptocurrency exchange?
Be careful when picking a crypto exchange. Some
platforms provide wallets that do not let you transfer your coins off of the
platform. This may create security risks if the exchange is hacked, or tax
issues if you ever wanted to move your crypto off of the platform. You’d have
to sell and rebuy your coins, which might cause you to realize some capital
gains.
These platforms facilitate crypto purchases, allow you
to convert cryptocurrencies back into dollars, and transfer them out of the
exchange. Different exchanges come with different features, which may sway you
toward choosing one exchange over another. Beyond fees, when choosing the best
crypto exchange for your needs, consider things like security, trading volumes,
educational resources and whether an exchange lists the cryptocurrencies you’re
interested in buying.
With cryptocurrency, the transaction cost is low to
nothing at all—unlike, for example, the fee for transferring money from a
digital wallet to a bank account. You can make transactions at any time of the
day or night, and there are no limits on purchases and withdrawals. And anyone
is free to use cryptocurrency, unlike setting up a bank account, which requires
documentation and other paperwork.
Exchanges work similarly to a broker, giving you the
tools to buy and sell cryptocurrencies like Bitcoin, Ethereum, and Tether. The
best cryptocurrency exchanges make it easy to buy and sell the currencies you
want with low fees and strong security features. Decentralized exchanges do not
allow for the trading of fiat currencies for digital ones, making them less
convenient for users that do not already hold cryptocurrencies.
Some crypto exchanges support advanced trading
features like margin accounts and futures trading, although these are less
commonly available to U.S.-based users. Others have features like crypto
staking or crypto loans that allow you to earn interest on your crypto
holdings. The best exchanges offer educational offerings to keep you up to date
on all things crypto.
If you want to learn more about this topic, feel free to leave your valuable comments. We are happy to assist you.
All the best for your future.
(All the material in this article are only the views of the author, and couldn’t be taken as “Financial Advice”)
Cryptocurrency Exchange List,
Cryptocurrency Exchange Platform
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