When Bitcoin (BTC) appeared in 2009 as the first cryptocurrency in the world no one could predict how popular it would become in the following decade. As the popularity and use of BTC grew, so did the number of altcoins. There are more than 4000 crypto coins and tokens available on the crypto market today. Currencies like Litecoin (LTC), Ethereum (ETH), Ripple (XRP), and others are making an impact on the financial market with their high trading volumes and market cap.
During the first years of establishing the cryptocurrency market, it wasn’t really easy to get your hands on some crypto. You had two choices; you could either mine a crypto like BTC yourself, by using the computational power of your PC or laptop, or you could buy Bitcoin from another person willing to directly sell you their coins for fiat currency like USD or EUR. Mining was a more complicated option, reserved for crypto enthusiasts willing to invest in mining rigs and equipped with the knowledge and patience to mine crypto.
Buying directly from strangers always carried the risk of possible scams or fraud, so it was a logical step for the community to quickly realize that a more secure, fast, and trustworthy way of trading cryptos was necessary. That’s when the first cryptocurrency exchange platforms appeared as a method of trading crypto.
During the last ten years, hundreds of these trading platforms have appeared, some of which are known for high trading volumes and are popular among users for their reliable services, and some that deal with smaller trading volumes but are specialized in more secure trading.
Let’s take a look at how crypto exchange platforms work and learn the basics of their functioning.
Cryptocurrency Trading and Blockchain Technology
Before we dive into crypto exchanges, we should mention the significance of blockchain technology in crypto trading to better understand why crypto exchanges were necessary.
Cryptocurrencies function with blockchain technology, which is used to facilitate the transfer of crypto assets and to mine new amounts of certain crypto assets by validating transactions and discovering new blockchain blocks.
When you trade a crypto, the transaction takes time to get validated depending on the cryptocurrency in question. The time it takes for your transfer to get verified depends on how busy the blockchain network is, and if there is a sufficient number of miners to handle the verification of transactions in a timely manner. With crypto exchanges, this process still exists since you can’t trade cryptos without using their blockchains to facilitate transfers, but all the searching for a trustworthy source to exchange your cryptos or fiat money with is history.
This way, things are much faster and you only need to wait for your transfers to be validated on the blockchain, which is really fast with most currencies when you are using a popular exchange platform with a high trading volume.
What Are Cryptocurrency Exchanges?
Just as foreign exchanges and stock exchanges exist for the sake of profiting from trading with the value of natural resources and company stocks, among other things, cryptocurrency exchanges are made to give people the ability to trade cryptocurrencies and make a profit from the difference in the value of different crypto trading pairs.
Digital assets are nothing like traditional fiat money, company stocks, oil, or gold. Cryptos are highly volatile and fluctuations in their prices happen constantly. Some currencies are relatively stable and unlikely to crash like BTC or ETH, but there are thousands of other cryptos that are very unpredictable.
Crypto exchanges are also called digital currency exchanges (DCE). They are online platforms that provide people with the means for fast and secure trading of cryptocurrencies, buying cryptos with fiat money, and exchanging cryptos for fiat money to cash out. You can trade, let’s say, BTC for ETH and you can then exchange your ETH for fiat money, if you wish, and withdraw your funds to your bank account. The possibilities are endless, especially given the fact that the biggest crypto exchange platforms today offer you to trade with thousands of different coins and tokens.
Different exchange platforms offer various options and features, with some exchanges specializing in specific types of cryptos like only BTC and ETH, while some offer a broad choice of altcoins. Some platforms are best for fast exchanges of cryptos, and others are better suited for serious crypto traders.
Crypto exchanges are very similar to stock exchanges, except that traders profit differently. Also, crypto exchanges are open 24/7 compared to stock exchanges that have set working hours, which means that the trading of cryptocurrencies never stops.
How Exchanges Earn Money
Crypto exchange platforms set the prices of currencies based upon the trading volume and market capitalization of their sellers and buyers. This is why different exchange platforms have different prices for the same currencies. There are no stable prices for cryptos and, essentially, the market itself has a direct influence on the prices, which are, of course, constantly changing.
There are several ways exchange platforms make money. The most important one is through fees. The services of exchange platforms aren’t free – they come with a price. But, be sure that these fees are definitely worth the fast, secure, and reliable service the exchange platforms provide their users with.
Transaction fees make enormous profits for exchange platforms since they are deducted from asset transfers every time a transaction between a buyer and a seller happens through the platform. These fees can be as low as 0.1%, which really isn’t much given the provided service you get. Smaller exchange platforms also have listing fees for providing currency listing services such as Initial Coin Offerings (ICOs).
Market making is another source of revenue for exchange platforms and it means to offer users a certain coin at a bit lower or a bit higher price compared to other exchanges. This is done to drive trading volumes of that crypto up by attracting traders who want to make a profit, and due to the higher volume, the exchange also makes additional profits; via giving a discount, if you will. Traders often buy a certain asset for a lower price on one exchange and then sell it for a higher price on another platform.
There are two types of crypto exchange platforms: decentralized and centralized ones.
Decentralized platforms are really popular for several reasons. They aren’t operated by third-party services, but instead, they have a decentralized platform structure. Funds aren’t controlled by a central authority making them less prone to cyber attacks and possible manipulations regarding prices and trading fraud.
Decentralized platforms usually don’t require KYC (know your customer) protocols, which means your identity is kept safe and your private data isn’t exposed to possible third parties. The trade process on these types of exchanges is basically a peer-to-peer type of transfer, but it is facilitated by the platform software using an automated process that makes transfers happen really fast. Some of the most popular decentralized exchanges are Changelly and Uniswap.
Centralized crypto exchanges, unlike decentralized ones, are run by a single company that owns the software and the whole digital infrastructure of the exchange platform. These exchanges control the funds that are being exchanged and have full access to the transfer data. Most centralized exchanges do require KYC (know your customer) protocol in order to ensure no scams and fraudulent behavior takes place on the platform. Such exchanges are known to be very reliable and highly secure systems where high volumes of cryptocurrencies are being traded.
Transactions on centralized exchange platforms are facilitated through the software approved and installed by the central authority of the company that owns the exchange and monitors all the transactions and daily operations such as security, platform growth, software updates, and system maintenance. Kraken, Binance, and Coinbase are some of the most popular centralized crypto exchanges.
A Few Words Before You Go…
Cryptocurrency exchange platforms have made buying, selling, and trading cryptos a lot easier and safer for people around the world. When people first started trading cryptos in the early 2010s, it was really complicated to find someone willing to trade a certain amount of digital assets you were looking for and to agree to the price you can afford.
Nowadays, you simply make an account on a crypto exchange platform and you can literally find trading opportunities in a couple of minutes. The enormous trading volumes of different cryptos along with the huge market caps wouldn’t be possible without the hundreds of crypto exchanges where brokers, traders, and crypto enthusiasts trade assets on a daily basis.
With crypto exchanges, all you have to do is load your account with money using a credit card, debit card, bank transfer, or payment service such as PayPal, and you are ready to trade assets.