What Is Crypto Exchange And How It Works? – Simple Guide

Coinbase, Gemini, Binance, Kraken are not mythical creatures or the latest digital buzzwords. These are all cryptocurrency exchanges- a digital platform where you can conveniently purchase or sell and trade any crypto. It is essential to have enough knowledge about What Is Crypto Exchange And How It Works before getting into it.

what is crypto exchange and how it works

You cannot buy cryptocurrency from your bank or any investing firm. For doing so, you will have to create an account on a crypto exchange platform to exchange your fiat currency for digital assets. Feeling hard, right?! Don’t be stressed. 

Here’s everything you need to understand about what is crypto exchange and how it works? And why is crypto exchange meaningful? Let’s have a look at this now. 

What Is Crypto Exchange And How It Works?

Crypto exchange is a marketplace or a platform where you can buy or sell any digital currency. You can utilize the exchanging platform to trade one cryptocurrency from another, such as converting Bitcoin to Litecoin or buying cryptocurrency using regular currency.

The exchanges reflect the recent market prices of any digital currency they provide. Through this, you can also convert your cryptocurrencies back into fiat currencies to get cash into your account or withdraw it from your regular bank account.

We can’t say there is anyone best crypto exchange because the choice varies from user to user. You should evaluate your interest in cryptos and find your exchange platform that suits your goals.

For example, if you are looking for a specific crypto coin or want to continue learning more about crypto investing. All these options will lead you to choose a crypto exchange platform.

In fact, the cryptocurrency exchange is said to be an intermediate between a buyer and a seller to make money through commissions and transaction fees.

Centralized And Decentralized Cryptocurrency Exchanges

The centralized cryptocurrency exchange platform serves as a third party between buyers and sellers. The centralized exchanging platforms are operated and controlled by a company. Thus, they offer additional reliability. Centralized exchanges handle 99% of all cryptocurrency transactions. 

Coinbase, GDAX, Kraken, and Gemini are some centralized cryptocurrency exchanges.

However, Decentralized cryptocurrencies exchanges (DEX) will allow users to operate peer-to-peer transactions without the requirement of a third party or an intermediary. Because of some issues associated with centralized exchanges, many users prefer a decentralized exchange. Moreover, decentralized exchanges do not ease trading fiat currencies for cryptos.

Examples of decentralized cryptocurrency exchanges are- AirSwap, Barterdex, Blocknet, io.

Suppose if you are interested in knowing a few Best Crypto Trading Platforms check this.

Pros Of Centralized Cryptocurrency Exchanges

1. Ergonomic- the centralized exchanges provide newcomer investors with a familiar and user-friendly way of exchanging and investing in cryptocurrencies. Unlike peer-to-peer transactions and crypto wallets, which can be complex, end-users of centralized exchanges can log into their accounts, see their account balances, and make transactions through websites and apps.

2. Authentic- the centralized exchanging platforms offer an additional layer of security and authenticity during transactions and trading. Smoothing the transactions through a developed, centralized platform will deliver a higher comfort level.

Cons Of Centralized Cryptocurrency Exchanges

1. Hacking Risk- as I mentioned, centralized exchanges are operated by companies accountable for holding their customers. And large exchanges involve billions of dollars worth of Bitcoins, making them a good target for hackers.

2. Transaction Fees- contrary to peer-to-peer transactions, the centralized exchange platforms charge high transaction fees for their services, and it can be massive if the trading involves large amounts.

Pros Of Decentralized Cryptocurrency Exchanges

1. Reducing Hacking Risks- the users of decentralized exchanges do not have to transfer their assets to a third or an intermediary party. That is why there’s very little to no risk of a company or an institution getting hacked, and thus the end-users are assured of safety from hacking and theft.

2. Avert Market Manipulation- due to the habit of allowing peer-to-peer exchange of cryptos, the decentralized exchanges prevent any market manipulations, thus protecting users from fake and wash tradings.

3. Confidentiality- decentralized exchanges do not ask their customers to fill out KYC forms, thus, offering privacy and confidentiality to users.

Cons Of Decentralized Cryptocurrency Exchanges

1. Intricacy- the users of decentralized exchanges must know that the keys and passwords to their crypto wallets are lost forever and cannot be recovered. It requires the users to learn and get familiar with the platform and the steps contrary to centralized exchanges that offer extra convenience and user-friendly processes.

2. Liquidity Problems- the majority of the crypto transactions are done smoothly by centralized exchanges, which indicates that they are accountable for most of the trading volume. Because of the lack of volume, decentralized exchange platforms often lack liquidity or cash flow, and thus it can be challenging to find buyers and sellers when the exchange volumes are low.

3. Scarcity Of Fiat Payments- decentralized exchanges do not allow for trading fiat currencies for digital ones, making them less appropriate for users that do not hold cryptocurrencies.

How Does It Work? 

When you open an account in a crypto exchange, you can buy or sell cryptocurrencies like BTC, ETH, LTC, DOT, DOGE, and more. You can buy cryptos using regular currency or exchange one form of crypto for another based on your exchange.

The bigger the service is, the more likely it is to offer a range of cryptocurrencies. For trading on crypto exchange platforms, you have to finance your exchange account- also called a wallet. Also, remember that A Cryptocurrency Wallet offered by an exchange platform or an app is held on that platform. 

Thus, it’s recommended that you set up your crypto wallet to ensure security. You can select a buy order to purchase a crypto coin, and your respective order will be added to the order book along with added buy or sell orders.

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