Cryptocurrency exchange is a platform where you can buy, sell, exchange and store various types of cryptocurrency. Such exchanges provide opportunities for exchanging one cryptocurrency for another or cryptocurrency for real money (also called «fiat money» in this context).
The principle of a cryptographic exchange functioning is similar to its predecessors — commodity, currency and stock exchanges. The value of a certain cryptocurrency is determined by the ratio of supply and demand.
The main feature of a cryptocurrency exchange is the simplicity of working with it. You do not need a broker, any special accreditation or long-term training to start trading on a crypto-exchange. It would be well enough just to understand the basic points that will be explained in this article.
Types of cryptocurrency exchanges
All crypto-exchanges are conditionally divided into 4 types in accordance with the objectives of the activity and strategies of achieving them:
- Trading platforms: Here the value of a certain cryptocurrency is formed directly depending on the indicators of supply and demand on the leading exchanges. Most modern crypto-exchanges operate on this principle.
- Exchanges with direct trade: Here each user can independently set the buying or selling price of a certain cryptocurrency expecting the corresponding offer from another user. Such platforms are most often used by traders to easily exchange one type of cryptocurrency for another.
- Brokers: They also provide the opportunity to exchange one cryptocurrency for another, although not at free quotes, but at the rates set by the broker.
- Cryptocurrency funds: Such exchanges allow to store cryptocurrency savings and invest them with the help of professional traders. In cryptocurrency funds buying and selling operations are executed at the level of digital assets rather than specific cryptocurrency amounts.
Cryptocurrency exchanges are also divided into 2 main groups by management type:
- Centralizedcrypto-exchanges belong to the certain companies with a staff of specialists and a decision-making center. Funds of traders who are involved in the cryptocurrencies sale and purchase process on centralized cryptocurrency exchanges are accumulated in the wallets of the exchange itself. Examples of such exchanges: Binance, Exmo, Bitfinex.
- Decentralized crypto-exchanges use blockchain technology that does not require any management. Cryptocurrency trading on decentralized exchanges takes place directly between its participants — traders. Examples of such exchanges: Etherdelta, DEX.
How the cryptocurrency exchange works
The direct path of a novice trader on a cryptocurrency exchange consists of 5 basic steps:
- Account registration: only an email address, login and password are required, registration confirmation usually ends with a link sent to the specified email.
- Personal data verification: this procedure may vary on different crypto-exchanges, but more often it is necessary either to provide a scan of a passport or a picture of you with a document in hand; Some exchanges also request the proof of bank account ownership.
- Balance replenishment: as a rule, you can deposit funds to your virtual wallet with both crypto and fiat currencies (ordinary money from a bank account or other sources of virtual funds storage).
- Trading or conversion: depending on your goals, you can try to make money on the difference in the buying and selling rates of cryptocurrencies or simply exchange one type of cryptocurrency for another.
- Funds withdrawal: your current positive balance in a cryptocurrency or fiat (real money) can be withdrawn to e-wallets or bank accounts in accordance with the rules of a certain crypto-exchange.
How to play on a cryptocurrency exchange
You can earn on a crypto-exchange when it is profitable to exchange the cheaper cryptocurrency for the more expensive one. In order to make profit each trader performs the following sequence of actions:
- Performing market analysis, identifying trends in increasing and decreasing values of the selected cryptocurrency types.
- Choose between buying or selling cryptocurrencies.
- Order processing: when the amount of cryptocurrency to be purchased is specified, the system automatically calculates the amount of cryptocurrency to be debited from your account when opening a declared position.
- Confirmation of the start of trading using the «Buy» or «Sell» button depending on your preferred action — buying or selling cryptocurrency respectively.
- Waiting for the moment when it will be most profitable to buy or sell a certain cryptocurrency to make the corresponding action.
- Making a return transaction that allows you to make a profit.
Purchasing 5 monero for 10 litecoin to then sell 10 litecoin for 5.1 monero is a simple example of the aforementioned chain. The most important is to choose the correct cryptocurrency for the exchange and determine the right time to make a reverse transaction. Even a small difference in the purchased cryptocurrency value can bring a decent amount of fiat money (real money).
How to choose a cryptocurrency exchange
We recommend you to focus on the following features of a cryptocurrency exchange when choosing the optimal trading platform:
- Exchange turnover — the higher it is, the better. This indicator can be called the only impersonal factor for making the correct choice.
- Reputation among traders — it is also important to study various reviews of the certain trading website and interpret them correctly.
- The level of protection against hacker attacks — an impeccable history of the high volume crypto-exchange is considered to be the best indicator in terms of security.
- Commission amount — this indicator may vary slightly between the most popular crypto-exchanges, but even the smallest difference can be quite significant.
- Conversion rates — offered by almost every exchange, though they can differ significantly for certain cryptocurrencies.
- Geographical restrictions — each crypto-exchange has a list of countries where the access to it is prohibited. Make sure that your country was not included into this list.