How do crypto exchanges work

If you are interested in taking advantage of the opportunities offered by the cryptocurrency space, you may be wondering where to start. If you are going to develop in crypto trading, it is important to understand the basics of one of the most significant things — cryptocurrency exchanges. Now we’re going to look at some important questions you should know before you get started. How do cryptocurrency exchanges work? What is the difference between centralized and decentralized crypto exchanges? Today you will get answers to these and many other questions. If you want to know more about how crypto exchanges work, be sure to finish this material.

What is a crypto exchange?

A cryptocurrency exchange is a platform where you can buy and sell digital assets and make transactions with them. You can trade some cryptocurrencies for others, or buy them in exchange for fiat. For instance, you can convert Bitcoin into other coins or withdraw digital assets from a crypto wallet into fiat

The cryptocurrency exchange also displays the current prices of different crypto. Also, cryptocurrency exchanges offer other services like staking, where you freeze a certain amount of digital assets in your wallet to keep the network running. You can also use fiat to buy coins. Let’s understand how cryptocurrency exchanges work. For starting to buy and sell digital assets, the user registers on a crypto exchange and creates an order for cryptocurrency, specifying the worth. When another user of the cryptocurrency exchange encounters someone who wants that particular coin, they make a transaction. The cryptocurrency exchange receives a percentage of each such transaction. It is very simple and now you know how crypto exchange works.

What are the different crypto exchanges?

The bankruptcy of a major centralized FTX exchange has caused a wave of distrust in these platforms. However, since the advent of Bitcoin, all trading in crypto has been conducted exclusively through centralized crypto exchanges (CEX). 

The demand for DEX grew in 2017 when the ICO fever led to the appearance of thousands of new tokens and smart contracts. Most of these tokens were traded on DEX, as the centralized platforms required a complex selection process. So, let’s take a quick look at CEX/DEX type of exchanges:

  • In centralized exchanges, the maximum number of functions is concentrated in the hands of the management, as in the classic examples of stock and currency markets. So, centralized crypto exchanges are governed by specific legal entities that are responsible for the operation of the site, the protection of user funds, and compliance with the law. 
  • A decentralized exchange is an application where trading takes place through smart contracts without the use of a centralized system. The fundamental difference from CEX platforms is that they don’t hold user funds and don’t control operations. There is also no KYC process, which means you can make deals completely anonymous, which is often used by fraudsters.

For instance, the centralized exchanges Binance, Coinbase, and KuCoin took an algorithm that had worked for many years with fiat before crypto and applied it to a new market. Among the DEXs are Uniswap, dYdX, and Kine Protocol. On the ApolloX crypto exchange, you can trade decentralized Bitcoin futures.

How to choose a crypto exchange

So, choosing a crypto exchange is the priority for novice traders. Of course, it is important to know about exchange work, but you also need to be able to select the best option. You can find ratings of platforms by their level of reliability, speed, and fees for transactions. Let’s highlight the points you should pay attention to when selecting a crypto exchange:

  • Terms of deposit and fiat withdrawal. Clarify this point before you start and choose a site that is convenient for you. 
  • Registration and verification. Some platforms require complete registration and submission of personal information for identity verification. If this does not suit you, look for a crypto exchange that offers access to anonymous work.
  • Pay attention to the daily turnover and liquidity. The bigger it is, the more users are on the platform, which means it is popular and trustworthy. The more popular exchanges usually have the largest trading volumes and liquidity levels.
  • The list of available cryptocurrency pairs. Of course, a convenient platform must provide the opportunity to trade the most popular crypto assets, including Bitcoin.
  • Security. In addition to trading volume, reliable crypto exchanges strive to offer a decent level of security for their users.

As for transaction fees, there is a simple rule: the easier it is to buy/sell digital assets on the exchange, the more you have to pay. You must also decide which crypto wallet to use. We touched on this topic because you can choose a cryptocurrency exchange wallet. Many platforms offer a wallet, such as Coinbase. You can keep the keys to your assets online or on a cold wallet, which is a special USB drive. Many experts warn against exchanges that only allow you to keep Bitcoin or other coins on their platform. Although this option is suitable for beginners who are just learning and don’t keep all cryptocurrency in one place.

Do crypto exchanges charge fees?

Different types of fees are charged depending on the services provided by the platform. It is often possible to view the fee structure of a particular exchange. For example, buying and selling a coin is subject to a fee that can range from 0% and 1.5% or more of the deal.

How can you be sure a crypto exchange is legitimate?

To verify that the platform is legitimate, look for a history of refunding users in the event of hacking. You should also check if it is registered as a money service business. Be sure to look for standard security rules (e.g. a withdrawal warning). Also, pay attention to whether the address is clearly stated.