How Does a Cryptocurrency Exchange Work?
Over the years, the cryptocurrency market cap has soared significantly. And as such, every day, novel digital currencies are being introduced to the crypto market. Therefore, crypto investors—whether seasoned experts or novices are always in search of the best crypto exchange that will allow them to trade their digital assets smoothly. Similar to the more conventional stock exchanges found around the globe, cryptocurrency exchanges allow you to buy or sell BTC and other cryptocurrencies. These platforms are designed to allow investors to initiate and trade digital assets.
Over time, many crypto enthusiasts have indicated their curiosity in understanding how these exchanges operate. This was due to the recent fall of FTX, one of the largest exchange platforms. Therefore, it is vital to understand what these exchanges are and how they function. In this article, we will explain what a cryptocurrency exchange is and how it functions to help you trade your digital assets conveniently.
What is a Cryptocurrency Exchange?
A cryptocurrency exchange is a platform that allows you to buy and sell digital currencies. These exchanges may host a variety of digital currencies, such as Bitcoin, Ethereum, or Tether. Cryptocurrency exchanges in the United States are similar to e-brokerages. This is because they can be accessed over internet-connected devices.
Before the advent of cryptocurrency exchanges, investors could only receive crypto by either mining the asset or transacting via many online and offline forums. But now, investors can engage in Bitcoin exchange via some of the best cryptocurrency exchanges that provide additional benefits to these investors.
A crypto exchange provides its users with tools and options to engage in cryptocurrency investment. However, these platforms charge a fee for every transaction made by an investor. The volume of your transaction and the type of transaction carried out may determine the fee.
How Does A Cryptocurrency Exchange Function?
A cryptocurrency exchange allows you to trade one cryptocurrency for another. You can also exchange fiat money for a digital currency. To use any exchange, you have to set up an account with such a platform. To set up an account, you have to ensure that you comply with the Know-Your-Customer (KYC) requirements. However, before you select a crypto exchange platform in the United States, there are certain things you need to check.
First, do proper research. An exchange’s records and reputation are vital to selecting the crypto exchange of your choice. For exchanges in the United States, research on the founders of exchange. You can also research its legitimacy and how such a platform addresses customer-related issues. The exchange should also have proper and robust security measures.
Additionally, always check pairs and fees that are offered on the platform. This is vital because it may affect your daily crypto investment. Fees and pairs usually vary from one exchange to another. You must also ensure that the particular platform is registered or incorporated in the United States.
Also, if your desired platform offers crypto investment programs, it must notify you of what it does with your investment. This way, you will be able to determine whether your investment is being misappropriated or not. Moreover, the cryptocurrency platform must have a viable customer support system.
Types of Cryptocurrency Exchanges
As a crypto investor, knowing the best cryptocurrency exchange is crucial. Cryptocurrency exchanges are delineated based on the regulations surrounding them. Therefore, cryptocurrency exchanges could either be:
- Centralized exchanges
Centralized exchanges (CEX) are exchanges that are regulated by a single authority. These types of exchanges have regulations in place that monitor every transaction done on the platform. Centralized exchanges also come with their benefits. First, these exchanges provide great liquidity to their users. Also, these exchanges handle transactions faster and, in cases of loss of funds, are able to recover your funds easily. However, centralized exchanges can be breached by hackers. These exchanges are susceptible because data is stored across centralized servers. Also, some of these exchanges have been found to manipulate trading volume in the past.
CEXs usually operate with an “order book” system. This means that every user’s buy and sell orders are listed and sorted based on the buy or sell price. The corresponding engine of the exchange then matches the buyers and sellers based on the best price given and the needed lot size. Notable examples include Gemini, Bitfinex, Coinbase, and Binance.
- Decentralized exchanges
These types of exchanges are known as DEX. DEX is the opposite of centralized exchanges. They operate on the basis of a distributed ledger infrastructure. DEX allows the trading of currencies without the supervision of any central authority. They are fully autonomous, allowing the users to transact without having to comply with KYC formalities.
DEX also comes with its benefits. The autonomous nature of such exchanges allows the users to have full custody of their funds. Further, DEX ensures its users have their privacy when it comes to transacting on the platform. However, low liquidity is an issue to look out for when using DEX. Also, if you are a newbie looking for exchange platforms in the US, DEX may not be your best go-to option at the start. There may be a lack of intermediaries to facilitate the trading process so a successful trade may require seasoned investors who are already familiar with the platform.
DEXs rely on smart contracts. Smart contracts are self-executing pieces of code on a particular blockchain. These contracts allow for a lesser cost of transaction and increased privacy. Notable examples include Pancake Swap, Huobi, and Uniswap.
- Hybrid Exchanges:
Finally, hybrid exchanges are platforms built to offer both CEX and DEX services. These types of exchanges grant you the ease of CEX while offering the privacy and security of DEX. However, these types of exchanges are still relatively new. As such, they may not have as much trading volume as independent centralized or decentralized platforms. Examples include Kraken and Bitstamp.
In summary, cryptocurrency exchanges have become one of the easiest means of Bitcoin exchange in the US. However, it may be daunting to pick the best exchange platform. This is why we have provided you with a detailed guide on how to select the best platform for your transactions. Remember, the best crypto exchange for you is one that is registered for operation in your country, has high liquidity, prioritizes security, and puts you first.