A cryptocurrency exchange is a digital marketplace for cryptocurrency traders. It offers a platform for buyers and sellers to transact either one cryptocurrency for another or cryptocurrency for fiat currency. It acts as an intermediary for buyers and sellers in cryptocurrency trading.
The cryptocurrency trading platforms work such that a trader registers in a platform and goes through a thorough verification process. If the process is a success, the trader is given an account to be able to access the pool of other traders. Buyers and sellers make orders, and other traders match their orders upon which the transaction is conducted. The role of the exchange is to serve as an intermediary, creating a pool of traders and creating a system to allow for transactions.
Types of cryptocurrency exchanges
There are different categories of cryptocurrency exchanges.
- Traditional cryptocurrency exchanges. These types of trades operate in a similar way to the stock exchange marketplace. Traders trade at the current cryptocurrency market prices. The exchange acts as an intermediary and traders are charged a transaction fee. Such exchanges allow traders to convert their digital currencies to fiat currency and vice versa. Egg Kraken and Shapelift
- Direct trading exchanges. Direct trading exchanges operate as a mediator for peer-to-peer trading. Unlike in traditional trades, exchange rates are not fixed. Instead, traders set their own rates.
- Cryptocurrency brokers. Mostly they are website-based exchanges where the exchange place serves as a broker that allows buyers and sellers to buy or sell currencies at the market price and a premium charge. They work best for traders who want to transact urgently as they do not need to wait for a seller or buyer to match their order is found. E.G Coinbase
- Cryptocurrency funds. These are funds that hold cryptocurrency and oversee that they are professionally managed while allowing the public to buy. E.g., GBTC
- Private exchanges. These are exclusive exchanges operated and traded on an invite-only basis.
Advantages of cryptocurrency trading over exchanges
- Exchanges offer safety to both buyers and sellers. Reputable exchanges act as a third party that verifies and oversees the transaction process. Due to the thorough verification process, it eliminates fraud.
- Cryptocurrency transactions can take a long time, sometimes days as buyers try to find sellers and vice versa. Exchanges simplify and hasten the transaction process by creating a pool of traders and also automating the transaction process.
- As a third party, an exchange place acts as an arbitrator to resolve disputes that may arise in the cause of a transaction.
- Storing cryptocurrency in an exchange account offers liquidity. In case one requires regular currency urgently, they can be able to trade it in a short time.
- Transaction on cryptocurrency exchanges comes at a cost. Traders are charged transaction fees on their transacted amounts.
- Not all exchanges are legitimate. While many exchange places are reputable, there have been cases of fraudulent transactions and unstable exchanges that close down unexpectedly causing traders to lose both fiat currency and cryptocurrency.
Cryptocurrency exchanges offer traders a safe platform for trading. By doing one’s due diligence, traders can find reputable trade partners and places that can enable them to trade seamlessly.