Source: wikipedia

What is a Cryptocurrency Exchange and How Do They Work – 2024 Guide

Ever since Satoshi Nakamoto wrote the code for cryptocurrency, thousands of people around the world started getting interested in the way it works. While there were many people who jumped into the ship, others were looking at what was going on from afar. One thing is for sure, Bitcoin is attracting people’s attention. If you are just starting your journey with cryptocurrency, there are probably many things that are not familiar to you. Don’t worry, we are here to help you out and explain everything you need to know about the cryptocurrency exchange.

What is a cryptocurrency exchange?

Source: sofi

In the beginning, people who wanted to exchange Bitcoins used to go through very complicated processes. It required finding a person willing to sell the amount you need, installing the software for mining and dedicating numerous hours to this process. However, as the demand for Bitcoins started to rise, new options started appearing making it easier for all the people to exchange Bitcoins to the wanted currency.

Every new currency that appears needs to be traded and cryptocurrency is no different. However, the way it occurs is different than with the usual currencies. Trading your Bitcoins for fiat currency is not the problem, it can be done easily. However, since the nature of cryptocurrencies differs from the nature of all the currencies we are used to, it requires a special platform for trading. It needs to be specific and created with those specifics in mind. The pioneers who started dealing with crypto trading used the concept of the traditional exchange and then adapted it to the requirements of this new market.

It is a platform where buyers and sellers meet. They are also known as traders, so don’t let that confuse you. The great thing about it is that it is available all the time. For comparison, the stock exchange is only available during certain hours. You may be asked to pay a fee which is also known as a volume-based fee. It is important to mention that cryptocurrency exchange is different from a cryptocurrency wallet, but some exchanges offer it as well. Various exchange sites offer various levels of protection, security, control, and privacy.

How does it work?

Source: forbes

In order for the purchase to happen, a buyer is required to fund the account. In order to do that, one can use a cryptocurrency or a local currency. Usually, the exchange accepts the credit card or a bank transfer as a way of payment. Lately, many crypto exchanges add PayPal as a way of payment. There is an option “buy” that you can click on and request to purchase Bitcoins at an affordable price.

On the other hand, there is the option “sell” that a person uses to sell a certain amount of Bitcoins. They always set the price above the minimum since that improves liquidity. Simply put, this means that traders will have more cryptocurrency available. When the order to buy or sell is set, then the exchange updates the “order book” which is a list of all the wanted exchanges along with the wanted prices. The exchange acts as a service for matchmaking between the two people who manage to agree on the terms. The trade happens if there is a match. If the match doesn’t happen, there is no trade.

It is important to say that the exchange doesn’t set the value or the price. It is a middleman and it creates opportunities for the people, responding to the supply and demand on the market. So, basically, the supply and demand will play a major role in setting the prices. This is the main reason behind seeing various prices on different exchanges. Keep in mind that there is no unique price set for all countries.

The types of exchange

Source: hedgespots

There are two types of exchanges: centralized and decentralized. Centralized one refers to the one run by the organization or the third party. This means that they will be responsible for handling the money. This is very similar to the way banks handle the money. Centralized is the term that means that the handling is done by the middleman who takes care of the trades. The middleman is a trained professional or a team experienced with handling the money. This is why many people prefer it then handling the trading by themselves.

On the other hand, decentralized exchange refers to eliminating the middleman. This means that all the transactions are done on your own, without any participation of the banks and the government. This way, trading becomes a very personal experience where you can fully control your currencies. The exchanges are based on the Ethereum smart contracts. This means that the people who want to trade must manage transactions on the blockchain itself when they wish to do something with their funds.

When it comes to the main characteristics of the exchange, it is necessary to pay attention to credibility. The exchanging must be trustworthy, so you can be confident knowing that your funds are handled properly. Make sure you get familiar with all the fees, payments and terms of service because each exchange has different terms. Also, make sure you get familiar with the regulations and restrictions concerning the cryptocurrency in your country. Considering that this currency is relatively new, there is no unanimous situation everywhere.

We hope we shed a little light on the way that the cryptocurrency exchange works. The most important thing is to get familiar with the basics and then slowly start learning about all stages of the process. This is the only way to properly handle everything and evolve. If you want to test the waters, check and start earning with Bitcoin. Thousands of people have used it and turned their life around. You can easily become one of them. Even though Bitcoin is relatively young, ever since it appeared it exceeded expectations and it broke all the known rules. We are sure that its time is yet to come!

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