How do cryptocurrency exchanges work?

Exchange works by matching buyers and sellers. Traders looking to transact in cryptocurrencies join a trade “forum” to be able to leverage on the pool of traders that the exchange has created.

How to join an exchange?

To be able to trade via an exchange, users identify a transaction of their choice and register. They go through a verification process for the exchange to be able to verify their identity. Upon successful registration, the trade opens an account for the user. Standard procedure requires all account holders deposit a certain amount of fund in the account whether they intend to buy or sell. This a step further to ensure the credibility of all users.

How does the exchange process work?

In the online marketplace, traders are designated as either markers or takers.  If a trader places a limit order, the exchange adds the order to the order book where it remains until another trader matches the trader’s suggested trading price. If a match is reached, the trader who set the order is referred to as the marker. If a trader places an order and it is immediately filled, they are referred to as a taker.

Market order

By placing a market order, a seller is authorizing the exchange agency to trade his coins at the best price in the market.

Limit order

When a buyer places a limit order, they are authorizing the agency to trade coins at a price below the market price. On the other hand, when a seller sets a limit order, they are asking the exchange agency to trade their coins at a rate higher than what the market is offering. Buyers and sellers usually set a lower limit order when they think that there is a chance to get a better price in the market

Margin Lending

Some exchanges offer a service to lend traders fiat money or cryptocurrency so that to be able to increase purchase limit or wait for the price of digital currency to decrease respectively.

Transaction Fees

Exchanges charge traders transaction fees for each completed transaction. The costs are charged to the seller but not the buyer. Exchange transaction fee rates depend on the volume of cryptocurrency being traded. The fee can vary up to one percent of the amount of cryptocurrency traded. The rate may differ from one exchange platform to another. It may also vary for different cryptocurrencies

Accepted payment methods vary from one exchange place to another. Commonly accepted payment methods include bank transfers, wire transfers, credit cards and debits cards, money orders and electronic wallets. These methods work both When a trader wants to deposit or withdraw money to and from their accounts. The length of time and cost of withdrawal or deposit varies from one method to another.

Another factor that may ultimately affect the transaction fee is currency conversion rates. Different exchanges accept different currencies. If the exchange place does not accept a trader’s currency, they will be required to convert to an accepted currency which adds to the cost of transacting.

Cryptocurrency exchanges have set up diligent yet straightforward procedures that speed up transaction while providing safety to traders. Joining one is simple, and users can begin to trade immediately after their accounts have been created.

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