A cryptocurrency is an electronic form of money that is beyond the regulation, restriction, or confiscation of any central bank or banking authority. Cryptocurrency exchanges are platforms through which investors can trade between cryptocurrencies. In some cases, investors can trade fiat money to cryptocurrencies.
How Cryptocurrency Exchanges Work
The idea of cryptocurrency exchanges is a little different from the exchanges that we know such as the stock exchange. In crypto trading, you need to trade your fiat money for a base currency such as Bitcoin, Ethereum, or Litecoin. You can either hold these in a cryptocurrency wallet or your cryptocurrency exchange balance.
If you keep them in a cryptocurrency wallet, you have to transfer the amount of digital assets you want to trade to the cryptocurrency exchange. If you bought cryptocurrencies directly on the cryptocurrency exchange, you could trade some of the base coins you have for other altcoins. Trading in a cryptocurrency exchange involves two parties, the maker who places an order and creates liquidity in the market and the taker who takes up the order to satisfy it, thus removing the liquidity.
Another form of trading in cryptocurrency exchanges is the crypto futures trading. Here, investors can choose to make or take delivery of cryptocurrencies at a later date.
Without cryptocurrency exchanges trading platforms, cryptocurrency is impossible. Thus, a good knowledge of cryptocurrency exchange is a prerequisite and vital for four (4) reasons: to determine the fees required on trading platforms, to identify trading platforms, to determine their safety, and to determine their local availability.
1. To Find Out About Crypto Trading Fees
All cryptocurrency exchanges are designed to allow investors to access the cryptocurrency market. However, each crypto exchange platform differs in various elements including trading fees. You can compare fees here the types of fees that you can expect from a crypto trading and exchange platform, including fees for depositing, withdrawing, and for trading cryptocurrencies.
- Deposit Fees: You get to pay this as you remit digital assets into your cryptocurrency exchange account. Generally, deposit fees are less than 10% of any total remittance.
- Withdrawal Fees: If your cryptocurrency trades have made you some profit and you want to cash out, or if you want to move a part of your assets to a secondary wallet, you have to pay the exchange a token fee to do so. This fee is called a withdrawal fee.
- Trading Fees: Every cryptocurrency trade involves a maker and a taker. As mentioned, a maker sells and a taker buys crypto. Both are charged a small portion of what they make from a trade.
2. To Know the Types of Cryptocurrency Exchanges
Cryptocurrency exchanges are subdivided into three types. These three types offer varying
functionalities and benefits to users, so it is essential to know them.
- Centralized Cryptocurrency Exchange (CEX): The centralized cryptocurrency exchange is a type of cryptocurrency trading platform where the platform itself acts as a middleman between the trader (or maker) and the cryptocurrency market (the takers). For trading or exchange to happen, the CEX holdes an investor's (the maker) digital assets in the same way that a bank does. This custody of assets is a necessity to establish a measure of security and trust for trading to begin on a CEX.
- \Decentralized Cryptocurrency Exchange (DEX): A decentralized cryptocurrency exchange does not take the CEXs intermediary position. A DEX can be regarded as a pool where investors come together to buy and sell directly between themselves. DEXs are very secure using peer-to-peer systems, but are not yet as popular as CEXs.
- Hybrid Cryptocurrency Exchanges (HCX): Hybrid crypto exchange platforms are built as super-performing exchanges that offer the benefits of both CEXs and DEXs. They are developed to draw on the security of DEXs. HCXs are the newest versions of crypto exchange platforms to be established.
3. To Determine The Safety of an Exchange
As mentioned earlier, CEXs are still considered as standard practice in the cryptocurrency exchange market. However, CEXs are the subject of many cyberattacks. That means that, if you are looking to choose from the long list of CEXs available, you should be looking for the safest and most reliable.
Due to fewer regulations overseeing the activities of these exchanges, inexperienced individuals sometimes float exchanges that may jeopardize the investment of innocent clients. To find out which ones are safe, you should consider reading trusted online reviews. There, you get to know the vulnerability of an exchange to hacking attempts. You can find answers to questions such as“When the last hack was attempted on the exchange, was it successful or not?” You can also ask: “Is cashing out my assets a difficult process?”
4. To Determine Availability
Cryptocurrency exchanges might advertise based on their operations in a huge number of countries. However, you must be careful and meticulous enough to find out if they are available in locations where you frequently transact business. Otherwise, unavailability might leave you stranded in times when you least expect.
Another aspect of availability is if they allow for transactions to be done in your local currency. The ability to transact with local currencies can save you a lot of trouble when exchanging currencies while setting up your account.
Cryptocurrency exchanges are the only medium for successful cryptocurrency trades. They offer significant benefits to users. However, a reasonable degree of knowledge about them would help you anticipate and mitigate losses as well as avoid falling prey to criminals. Thus, due diligence while choosing a cryptocurrency exchange should be your priority.