Cryptocurrency exchange – definition and examples
A cryptocurrency exchange or digital currency exchange (DCE) is an exchange where we can buy or sell cryptocurrencies. We can trade them using electronic monetary units, fiat currencies, or other digital assets. Dollars, euros, pounds, yen, and yuan, for example, are fiat currencies, i.e., currencies that governments declare as legal tender. Digital assets are any assets that exist electronically, such as domain names, files, virtual property, or digital currency.
A typical cryptocurrency exchange works 24/7, i.e., it never closes. One of the reasons people like them is their anonymity feature. Nobody knows who the buyers and sellers in cryptocurrency exchanges are.
Modern technological solutions such as encryption (cryptography) make sure that the transactions are ultra secure. Cryptography is the art of creating and deciphering code.
Alpari.com says the following regarding these exchanges:
“On cryptocurrency exchanges, you can make instant transactions with cryptocurrencies.”
“You can buy or sell them for fiat currencies, or exchange them for electronic monetary units of another digital asset. Most of these exchanges run 24/7.”
A cryptocurrency exchange may be an online entity that exchanges transferred money and digital currencies electronically. It might also be a physical ‘bricks-and-mortar’ business that exchanges digital currencies and uses traditional payment methods.
Cryptocurrency exchange – Locations
Although most DCEs handle Western fiat currencies, the majority of them operate outside of Western countries. By being in other parts of the world, they can avoid regulatory oversight and prosecutions.
Most cryptocurrency exchanges have bank accounts in different countries. They usually accept credit card payments, and cryptocurrencies in exchange for digital currencies. They also accept wire transfers and postal money orders.
People with cryptocurrency wallets may receive cryptocurrency directly from a cryptocurrency exchange. Many of them can also convert digital currency balances into prepaid cards. The card owner can withdraw funds from ATMs across the world. These prepaid cards are anonymous.
Most DCEs and digital currency creators work independently of one another.
Cryptocurrency exchange types
Cryptocurrency exchanges are online platforms where traders can exchange one cryptocurrency for a fiat currency or another cryptocurrency. In other words, it is either like a currency exchange at a bank or airport or a stock exchange.
Below are the definitions of the most common types of exchanges:
Direct Trading Platform
This type of platform offers P2Ps trading between sellers and buyers. P2P means peer-to-peer. In other words, buyers and sellers deal directly and not through an exchange platform.
There is no fixed market price in this type of trade. Sellers typically set their own exchange rates.
Traditional cryptocurrency exchange
These are similar to a traditional stock exchange. Buyers and sellers base their trade on the current cryptocurrencies’ market price. The exchange, therefore, plays the role of intermediary.
According to CryptocurrencyFacts.com:
“Some of these types of exchanges deal only in cryptocurrency; others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin.”
This type of exchange usually operates exclusively online. It is similar to the currency exchange at a bank or airport.
The cryptocurrency broker allows its customers to trade in cryptocurrencies at a price it sets. Typically, this price is the market price plus a premium.
Shapeshift and Coinbase, for example, are cryptocurrency brokers.
This type of exchange is ideal for people who enter the world of cryptocurrencies for the first time. However, be prepared to pay marginally higher prices compared to the exchanges.
Here, professionals manage pools of cryptocurrency assets. The funds allow members of the public to purchase and hold cryptocurrencies through the fund.
You can invest in cryptocurrencies without having to purchase them directly. Also, with this service, you do not have to worry about storing cryptocurrencies.
What is a cryptocurrency?
A cryptocurrency is a type of digital currency. In other words, it is a currency that only exists electronically. Bitcoin, the most common cryptocurrency, went into circulation in 2009. In fact, Bitcoin was the first one.
Cryptocurrencies, unlike fiat currencies, do not have a central bank. They work using a series of records (blocks) which link to each other in chronological order. We call a chain of interlinked blocks a blockchain.
Cryptocurrencies or significantly more secure than traditional currencies. They use distributed ledger technology. This means that data regarding all transactions is stored in every block, rather than in a central ledger.
A successful cyber attack is only possible if you hit every block simultaneously. To achieve this is extremely difficult.
Video – using a cryptocurrency exchange
In this video, Amanda Johnson explains how we can exchange one cryptocurrency – such as Bitcoin or Litecoin – for another. She says it is easy and also a lot of fun!
There are two ways of trading cryptocurrencies. First, in an exchange where you have an account. Second, in an exchange where you do not have an account.