It is worth noting that life is very fleeting. Cryptocurrencies have been around for over a decade in the digital world. And as the dynamic on the site chainbroker.io/projects shows, during this time, they have proven their viability, with investors seeing them as a way to increase their profits and entrepreneur using them for payments.
Even though they are characterized by instability, their popularity is growing, and so is the number of cryptocurrency exchanges increasing. What are they? What types exist, and how do they work?
What is a cryptocurrency exchange?
Have you dreamed about such business as buying or selling cryptocurrencies? Then there is one useful place for it. This is a cryptocurrency exchange. It is an online platform that acts as an intermediary between buyers and sellers, allowing them to buy, trade, and exchange various cryptocurrencies, as well as traditional fiat currencies, such as dollars and euros, and vice versa. How does the exchange benefit from all this? It earns money from commissions charged for each transaction.
What types of exchanges are there?
There are several types of them. Each has its own specific characteristics and advantages. Let’s take a closer look at them.
Centralized (CEX)
This type is the most popular. It is managed by one particular company, which means that all transactions are processed on its servers. Even though centralized exchanges go against the basic principle of cryptocurrencies, which is decentralization, they facilitate cryptocurrency transactions greatly, as they offer a convenient and intuitive way to trade.
Decentralized (DEX)
Decentralized exchanges are most in line with the principles of cryptocurrencies, namely complete freedom of action. After all, unlike CEX, they are open source and the third party is not involved. Transactions take place only between buyers and sellers, which removes all the risk from the total control that is present in centralized. In addition, it is safer to make transactions here, since such exchanges do not have a central server that can be hacked by fraudsters. But the problem is that there are no fiat payments, and it is more difficult to use such exchanges. Therefore, they are better suited for experts than for beginners.
Hybrid
As you might guess from the name, they combine the advantages of the two top types of exchanges. The convenience of a centralized option as well as the freedom and security of a decentralized one are exactly the golden mean needed to achieve the best results. Currently, hybrid options are not so popular, but there are already certain steps that indicate that they will come out of the shadows in the near future.
What are the pros and cons?
Before immersing into the world of digital currencies, let’s consider their main advantages and disadvantages.
Pros:
- Convenience. Making transactions on the stock exchange is intuitive and understandable even for beginners. In addition, you can do it from anywhere in the world, if, of course, there is access to the Internet.
- Diversity. Exchanges provide the opportunity to trade and sell a wide variety of cryptocurrencies, from the famous Bitcoin to the new ApeCoin.
- Availability of tax information. It is provided by some exchanges to facilitate the calculation of taxes on cryptocurrency.
- Relative safety. Large exchanges are concerned about their users’ accounts, and therefore implement two-factor authentication and other security measures.
Cons:
- Some exchanges are still targeted by hackers and fraudsters, which leads to loss of money.
- There are great risks involved in cryptocurrency transactions due to the significant fluctuations in their value.
- If the exchange doesn’t work for any reason, access to your funds and the ability to make transactions is temporarily suspended.
The main features
Now we come to the main question: “How do cryptocurrency exchanges work?” They work on a 24/7 schedule, which gives freedom of choice and flexibility. All operations here are carried out using a live order book, which displays active offers. This has an impact on the exchange rate.
Cryptocurrency exchanges provide the opportunity to buy cryptocurrencies using US dollars, euros, or other fiat currencies. And vice versa, here you can convert cryptocurrency into regular currency to withdraw it as cash and then buy an apartment, car, or other desirable things with it. Or, as an option, leave it for trading. You can also exchange one cryptocurrency for another.
To understand the operation of the cryptocurrency exchange in more detail, let’s go through the basic steps with you a little:
Step 1: Create an account
As in a regular platform, you need to fill in personal information (usually this is data from an identity card and registration) and go through a procedure called client identification.
Step 2: Topping up the account (wallet)
To carry out any operations, you need to deposit funds into the exchange wallet in the form of fiat currency or cryptocurrency. You can do this by transferring from a bank account or your own crypto wallet.
Step 3: View prices for different cryptocurrencies
This is an important step that will help you compare the current prices determined by the market.
Step 4: Placing the order
After you looked at the prices, a complete picture was drawn in front of you. Now you can confidently place an order to buy/sell cryptocurrency specifying the desired currency pair and its amount. After placement, it will be added to the order book we mentioned above.
Step 5: Comparison of orders
After adding your order to the order book, the exchange matches it with the order of the potential buyer. If there is no match, your order is placed in the order book and will remain there until a person is found who agrees to buy/sell the corresponding crypto.
Step 6: Conclusion of the agreement
Finally, found the right buyer/seller. After that, you agree with him, and the corresponding amount is transferred from the seller’s wallet to the buyer’s wallet.
Step 7: Withdrawal
After the execution of the transaction, there is usually a withdrawal of cryptocurrency or fiat currency back to the cryptocurrency wallet or bank account.
Conclusion
Cryptocurrency exchanges have become an important part of today’s reality, in which everything goes digital, including money. They are the perfect place to buy, sell, and regularly trade cryptocurrencies. But to achieve great success, simply creating an account and placing an ad is not enough. First, you need to understand what cryptocurrency exchanges are, what their main advantages and disadvantages are, and how they work.