What Is a Cryptocurrency Exchange And How Does It Work? Tips That Will Help You Trade Crypto In 2020!

Are you ready to begin trading cryptocurrency? If you are new to this and you want to get into the crypto sphere by starting to trade, you have come to the right place. But, first and foremost, before we dig deep down and explain how does cryptocurrency exchange works, you must know that this is a 24-hour trading market, with lots of ups and downs. A fickle market of its own!

What are cryptocurrency exchanges?

Cryptocurrency exchanges are basically websites or platforms that allow you to buy, sell or exchange cryptocurrencies for other digital currencies or fiat currencies like the U.S. dollar or EURO. So, when you enter the crypto world for the first time, you will need to use fiat currency to buy your cryptocurrency. Let’s say you want to buy bitcoin, so you will need to use the U.S. dollar or EURO. You can buy crypto using your debit card. There is the other way also, where you can trade cryptocurrencies with each other. For example, you can trade Bitcoin with Etherium or any other cryptocurrency. So, a crypto exchange is like a bridge connecting buyers and traders with cryptocurrencies. But obviously, exchanges will charge small fees to trade. That is how they make their money!

Types of cryptocurrency exchanges

What are the types of cryptocurrency exchanges? There are currently three types of exchanges out there: Centralized Cryptocurrency Exchanges – CEX, Decentralized Exchanges – DEX and Hybrid ones.

1. The Centralized exchange plays the role of the middle-man where buyers and sellers come together. So this means you will have to trust someone else to hold your money.

2. The Decentralized exchange could be called as peer to peer area of trading. Here buyers and seller process transactions directly to each other. There is no middle man needed!

3. The Hybrid crypto exchange is a sort of a mix between the two mentioned above. Many believe such exchanges are the future of crypto trading since they merge the benefits of CEX and DEX.

How to start trading using a cryptocurrency exchange?

First, you have to create an account on a crypto exchange. Then connect this account to your bank account (debit card) so you can transfer funds to your wallet. After that, buy cryptocurrency with fiat currency using the exchange. To do this you will have to pick an exchange that allows using fiat currency to buy exchanges. Or, if you have existing crypto you can just transfer it to your account on an exchange. Then the exchange will hold on to your cryptocurrency while you watch the prices of other cryptocurrencies available. Afterward, you place your buy or sell orders once you choose your desired trade then the exchange completes your transaction.

There is something called “trading arbitrage” that will allow you to make small profits from the differing bitcoin prices, depending on how much time you want to spend researching. You have to be careful and make sure that the transaction fees and the fees implemented by the different exchanges don’t surpass the value difference if you decide to sell your Bitcoins on one exchange for a higher price and then buy it for a cheaper value. It could not be worth it!

5 factors to consider when choosing the exchange trading platform?

There is a sheer amount of crypto exchanging platforms out there and it is not easy to decide which one to go with. It is very important to choose the right platform and there are some factors that you should pay attention too!

  1. Security – What could we learn from Mt. Gox Scandal?

Mt. Gox was launched in 2010 reaching its peak in 2013 by becoming the largest bitcoin exchange platform. It was based in Tokyo, Japan and according to Wikipedia, it was handling over 70% of all bitcoin transactions worldwide. In February 2014 Mt. Gox suspended trading, closed its website and exchange services and then filed for bankruptcy protection from creditors.

It announced that 850.000 bitcoins belonging to customers were missing and that the company was stolen an amount of $450 million value at the time. The reasons for theft, hack or fraud were unclear. So, you must be careful when choosing the crypto exchange platform and pay attention to the security!

  1. Reputation

Check the exchanges that have a good reputation. Some of the top cryptocurrency exchanges are Binance, Bybit, Coinbase, Bitmex, etc. It is really important to check the reviews and make some research on google before deciding which one to go with. Check out the ratings of the exchanges since they are really important taking into account that you want to pick a trustworthy one!

  1. Fees and Payments

Make sure you know what method of payments the exchange offers. It could be a local bank, Paypal or a Credit Card. Check the exchange fees and make sure you know what you are signing up for, so read carefully the terms and conditions.

  1. Leverage trading

Traders can borrow a certain amount of funds for trades, based on the number of funds they hold on the exchange. This is called leverage trading. If you are interested in leverage training you should pay attention when picking the exchange platform because some of them have specific rules regarding liquidation levels and margin calls although multiple exchanges offer anywhere from 1x to 100x leverage.

  1. Volume

Cryptocurrency exchanges with a high volume of participants are the best ones to go with. If you are looking to sell a considered amount of bitcoin you might not be able to do so in a low volume platform as there will not be enough offers to buy it at a higher offer so you might be forced to sell it to a lower offer on the exchange.

In conclusion

Hopefully, you found this article to be valuable for you and you learned something from it. There are many crypto exchanges and it is hard to pick the right one. Although we gave 5 things to consider when choosing your crypto exchange make sure you do your own research before taking any action!