Cryptocurrency trading, Bitcoin, volatility, assets, you all must have heard or seen these terms associated with cryptocurrency trading and being in the news every day. But have you ever wondered what cryptocurrency exchanges are? How do they function? What aspects do they involve?
Well, indeed, this is not rocket science, but at the same time, this isn’t a cakewalk either. These terms need a little understanding. So, brace yourselves as it is going to be very interesting!
First, let’s start with the basics
What are cryptocurrency exchanges?
Are they platforms where the exchange of cryptocurrencies takes place? Well, yes, but this definition is too simplified and incomplete. So let us give you the meaning of the whole concept.
Cryptocurrency exchanges are platforms that aid in trading cryptocurrencies for other assets. These other assets include digital as well as fiat currencies. Cryptocurrency exchanges act as mediators between buyers and sellers of the cryptocurrency. Moreover, these platforms generate money for themselves through commissions and transaction fees.
how do cryptocurrency exchanges work?
Let’s say a person sets up an account on a crypto exchange platform, it will enable them to buy and sell various kinds of cryptocurrencies such as Bitcoin, Ether, Dogecoin, etc. In addition, one can also purchase crypto using a fiat currency such as gold or trade one form of crypto with another.
In addition to this, the services that are available or are offered may vary, depending upon the type of exchange which one is using. Such as, one can get their cryptocurrency converted back into regular cash, withdraw it, or even leave it in their account for future trade investments.
how to trade on cryptocurrency exchanges?
The first step you have to take is to find a suitable online exchange either as a buyer or as an investor. For that, you will have to do extensive research about various platforms, the history of the platform, and the kind of benefits you would be offered by these platforms.
To do that, the account needs to be funded. You can connect your crypto account with your bank account. Different platforms offer different options as well as funding via debit cards as well.
Then you need to select the token which you want to trade. The assets that you have chosen to trade also play a primary role in making profits. In the crypto market, a prominent aspect of the market involves dealing with the trading of popular tokens such as Bitcoin and Ethereum. But to avoid any inherent risks, you must continuously diversify your trading assets.
To understand how the trading takes place on these platforms, we must first look at the different types of cryptocurrency exchanges.
Types of Cryptocurrency Exchanges-
CENTRALIZED CRYPTOCURRENCY EXCHANGES
Centralized Cryptocurrency exchanges, or CEX, operate somewhat in the same way as traditional stock exchanges. One gives their money to the exchange, and they hold it for the user like a bank acting as the middlemen. One watches the available prices for the different cryptocurrencies. And depending on the exchange, they can trade their fiat currency (such as US Dollar) for the cryptocurrency. One can place their order, and the exchange finds a buyer for them.
DECENTRALIZED CRYPTOCURRENCY EXCHANGES
These kinds of cryptocurrency exchanges do not involve a company or any type of service to control the customer's assets. An automated process manages the transactions and the trades as they use blockchain technology which ultimately ensures a secure way of transferring cryptocurrencies without the existence and help of a central figure.
Advantages and Disadvantages OF CENTRALIZED VS Decentralized Cryptocurrency Exchanges
Third-party providers that organize trades between buyers and sellers control centralized exchanges. On the other hand, decentralized exchanges stick to the ideals of Satoshi Nakamoto; thus, they do not involve any third parties acting as intermediaries.
Centralized exchanges involve quick transactions and high liquidity, whereas Decentralized crypto exchanges allow users to maintain anonymity and are also very well secured.
The centralized exchanges charge transaction fees and are also in charge of the assets the traders hold on their platform. Moreover, they hold users' funds in the hot wallet, which is relatively easy to access. As a result, centralized exchanges are more vulnerable and prone to hacks, as witnessed in the history of cryptocurrency. Some good examples include Mt.Gox, BitFloor, and Poloniex.
When we come to Decentralized cryptocurrency exchanges, users should know that the transactions which take place through these platforms are pretty slow. The platform is not ideal for users who want to exploit the volatility of the crypto market. Decentralized exchanges do not enforce Anti-Money Laundering (AML) and Know Your Customer (KYC) laws, thus making them a hotspot for malicious activities.
HYBRID CRYPTOCURRENCY EXCHANGES
A Hybrid Cryptocurrency exchange is a combination of centralized and decentralized cryptocurrency exchanges. Hybrid exchanges use the best concepts offered by both the exchanges mentioned above. Hybrid exchange employs smart contracts to ensure that there is no central figure acting as a mediator and ultimately provides a more secure environment.
It’s up to you for identifying the cryptocurrency exchange and digital assets that best meet your goals, budget, risk tolerance, and security standards. It's also crucial to be aware that different crypto exchanges have different degrees of security and fees, and some exchanges are only available on mobile devices, while others need powerful, specialized computers.