What Are Crypto Exchanges and How Do They Work?
Before delving into how crypto exchanges work, you should understand what crypto exchanges are. Simply put, it is like a stock exchange of cryptocurrency. Crypto exchanges refer to a platform where buyers and sellers trade various digital assets whose value is based on current market prices.
In other words, this exchange platform offers cryptocurrency enthusiasts traditional fiat-to-currency transactions in addition to crypto-to-crypto trades. For instance, Bithumb – a Seoul based exchange platform, allows customers to buy cryptocurrencies with fiat currency (Dollars or Euros), as well as they can trade their digital currency for other digital assets.
Moreover, Crypto exchange is responsible for setting the rates of cryptocurrencies such as tokens and coins. Briefly, they allow customers to buy and sell coins, exchange one crypto asset for another, and exchange fiat money into cryptocurrency.
How do Crypto Exchanges Work?
Crypto exchanges can create billions of dollars in their trading volume each day. But the question arises, how do they work?
Crypto exchanges work similarly to stock exchanges. However, the only difference that distinct stock exchange from the crypto exchange is that traders can buy and sell stock exchange assets to profit from fluctuating rates. While on crypto exchanges, traders can use cryptocurrency pairs to gain profit from their volatile prices.
It is to note that different crypto exchanges perform different functions and offer options accordingly. For instance, some crypto exchanges offer trading pairs responsible for pairing fiat currency with a cryptocurrency like BTC/USD and LTC/EUR. This platform can help you to profit from changing rates of currencies. For crypto traders, this serves as a primary business.
However, you need to understand that order of these currencies in pairs matter a lot. For instance, if Bitcoin’s price increases against the US dollar, you need to buy a pair of BTC/USD. Here, it would be best if you put BTC first and then USD and vice versa.
Besides, you can use crypto exchange platforms for crypto-to-crypto that commands low fees. You need to convert funds into Bitcoin on exchange A on such platforms, and then you can trade another cryptocurrency to get your desired coins. Some crypto exchanges require new customers to undergo a registration process before they start buying and selling cryptocurrencies. Moreover, the levels of verification may vary for users. These refer to the ‘Know your Customers’ check to assure that they comply with established anti-money laundering laws.
Generally, there are two main types of cryptocurrency exchanges, namely, ‘traditional/centralized exchanges’ and ‘decentralized cryptocurrency exchange.’
- Centralized Cryptocurrency Exchange– this platform is run by a third party responsible for handling your fiat currency. It does not allow users full control over their private keys. Moreover, this exchange system is more vulnerable to hacks and scams as compared to decentralized exchanges.
- Decentralized Cryptocurrency Exchange– it lacks any central authority, and it runs on blockchain technology. This exchange uses a smart contract that represents digital assets while offering users an opportunity to trade. It is more secure than centralized exchanges.
Things to Look For When Exchanging Cryptocurrencies
When you are picking a crypto exchange platform, make sure that you have gone through these aspects.
Crypto exchange platforms should display their transaction information to be trustworthy.
● Transaction Fees
On different crypto exchange platforms, there are various fees and payments for transactions. When making transactions, make sure that you know about prices and payment methods that the exchange platform offers.
● Rules and Regulations
In some countries, they have accepted cryptocurrency in the mainstream. Whenever you select an exchange platform, make sure that it complies with your country’s governmental regulations.
Largest Cryptocurrency Exchanges
Here are the largest crypto exchanges in the world:
- Binance MLT
- Upbit ROK
- Huobi SIN
- Bittrex USA
- Bithumb KOR
- OKEx MLT
- Bitfinex HK
- Coinbase USA
- Bitstamp GBR
- Kraken USA
When selecting a perfect and right crypto exchange that suits your needs, it can be a complicated process, particularly when you have so many options. If you have decided to invest in cryptocurrency, we recommend going through the reviews of various crypto exchanges and how they work to make an informed decision that is beneficial in the long run. You may start reviewing from here: Koinal Joined Forces with Bithumb Global