What is a crypto exchange and how does it work
What is a crypto exchange and how does it work
Modern cryptocurrency exchanges are financial projects with impressive capitalization. They attract even conservative investors and provide a wide range of trading tools for all types of trading. At the same time, the cryptocurrency exchange trading familiar to today's traders has only a ten-year history. Nevertheless, it is full of bold technical solutions and large-scale innovative projects that have changed the perception of the digital economy.
A functioning cryptocurrency platform has been debugged - this is a complex financial ecosystem in which hundreds of thousands of traders are simultaneously trying to make a profit on the exchange of assets. In this article, we will try to concisely and easily describe the following topics:
Let's start with the main thing. Each cryptocurrency exchange has its own specifics and trading conditions, therefore, before choosing the optimal platform, you should study both the basic laws of trading and the mechanics of the crypto market itself.
The crypto market is a vast financial system. It includes all issued digital assets, financial derivatives, online exchanges and over-the-counter cryptocurrency exchange platforms. The interaction of individual market subsystems form cryptocurrency rates, which may differ significantly on different trading platforms.
The main factors influencing the cryptocurrency market include:
• public opinion formed by the media, financial experts and crypto entrepreneurs;
• implementation and implementation of new technologies that increase the speed and convenience of working with cryptocurrency, as well as guarantee the safety and confidentiality of personal investor accounts;
• increased competition between assets, which affects their liquidity.
Digital money is already affecting the economies of entire states. For example, the Chinese government issued the national cryptocurrency DCEP in 2020. Whether the crypto-yuan will have a serious impact on bitcoin exchanges is not yet known, but the precedent clearly indicates the prospects for the development of the crypto industry.
A crypto exchange, or as it is also called, a digital asset exchange, is a cryptocurrency trading platform that allows investors to buy and sell electronic coins by exchanging them for other digital money or fiat money (regular money). Most major exchanges provide their clients with the following basic features:
• storage of assets;
• a wide selection of currency pairs for exchange;
• tools for market analysis to make buying and selling cryptocurrency more profitable;
• trading tools for the automation of trading;
• services for replenishment and withdrawal of personal funds.
Functionally, cryptocurrencies are traded on the exchange by placing orders for the purchase and sale of assets by traders. When the price of the asset specified in the buyer's order matches the seller's price, the online exchange closes the deal. The process of closing trade transactions occurs automatically and in turn, and the exchange itself earns on the trading commission from each transaction.
The first cryptocurrency site in history to provide the ability to exchange bitcoins for fiat was a service launched in 2009. It was called the New Liberty Standard, and was more a virtual hub for crypto evangelists than a real exchange. BTC is also obliged to this site for the first attempt to determine its value, which was tied to the price of electricity spent on processing transactions in the coin's blockchain.
The crypto exchanges familiar to modern traders began to launch in 2010 - 2011, in parallel with the appearance of the first forks (copies) of bitcoin - Namecoin and Litecoin. MtGox and BitcoinMarket became the first services where bitcoins could be traded in real time.
The real boom in crypto trading came with the launch of the Bitfinex, Huobi and Binance exchanges. Since 2017, hundreds of crypto coins have been listed on their sites, and in 2020 Binance opened many fiat gateways, which made it possible to buy cryptocurrencies using the national currencies of different countries.
By now, traders no longer have the question of where to buy cryptocurrency and how profitable it is to exchange it for another asset. This is the main criterion for the popularity of crypto-exchanges, which allows literally everyone who wants to freely dispose of their digital accounts.
Before deciding how to trade on the cryptocurrency exchange, you should choose the type of trading platform. It depends on where and how assets will be stored, the cost of servicing transactions and many other parameters. There are two main types of cryptocurrency exchanges: centralized and decentralized.
Centralized Crypto Exchanges (CEX) store their clients' assets and their personal data on the exchange system wallets. On these platforms, a cryptocurrency trader receives the following benefits:
• high trading speed;
• profile trading instruments;
• correct service of accounts;
• the ability to trade any kind of cryptocurrency.
Also, CEX often provide their clients with materials on how to trade correctly and use the capabilities of the service to increase the profitability of transactions. However, these sites also have obvious drawbacks, the key ones of which are:
• insufficient anonymity of trade information;
• incomplete control over accounts;
• storing the data of all users in one place, which potentially poses a threat to their security.
Nevertheless, on centralized exchanges, the rate of bitcoin and other coins is more stable, which makes it possible to effectively implement trading tactics.
In order to understand how to trade cryptocurrency on a decentralized exchange (DEX), it is preferable to already have experience in trading on centralized exchanges. DEX platforms are more independent and require skills to work with multiple strategies. The main advantages of decentralized exchanges are:
• high confidentiality of client information;
• full control over wallets and accounts;
• negligible likelihood of becoming a victim of a hack by cybercriminals.
Experienced traders choose decentralized platforms for trading without intermediaries. But they also have disadvantages, which include:
• lack of support in case of erroneous operations;
• lack of analytical and trading tools;
• low trading speed.
The choice of the site directly depends on how to start trading on the exchange and what strategies to implement in trading. It is conventionally believed that decentralized platforms are good for exchanging cryptocurrencies, while centralized platforms are good for full-fledged trading.
In addition, operations with cryptocurrencies that do not support smart contracts are impossible on DEX platforms, and their list includes both bitcoin and all its forks.
To understand how a cryptocurrency exchange works, it is easiest to imagine a hierarchical scheme based on a trading core. It accepts and processes traders' orders, and also displays data on changes in user accounts to trading terminals.
The next step in the hierarchical structure of the exchange is hot and cold wallets. The former are used to conduct transactions, while the latter are used to store customer funds.
The last level in the structure of the cryptoexchange device is the interface. It allows users to both analyze the cryptocurrency market and work with orders, interacting directly with the core.
The first thing to know about how to make money on the cryptocurrency exchange is the impossibility of closing all transactions profitably. Especially in the early stages, it is important to understand that everyone fails, but regular trading and attention to detail can qualitatively change personal trading statistics.
The second, but no less important criterion for successful investment is working exclusively with available funds. Trading your main assets is too risky, and any experienced investor knows very well that working with finance primarily involves reducing risks.
Don't forget about diversification. Capital needs to be stored in different assets, because with an unfortunate coincidence of circumstances, or due to inattention, you can lose everything at once.
Also, it is worth using only the studied trading scenarios. In the beginning, it is advisable to avoid such cryptocurrency trading strategies as scalping or hodling. The first one is too dynamic and requires literally instant responses to course changes. The second involves the ability to create long-term forecasts, which also comes only with experience.
Investing in crypto exchanges can very well be a profitable investment. Modern crypto-exchanges offer their clients a safe environment for saving and maintaining assets, and the correct use of analytical and trading tools can really significantly increase the chances of earning income.
But why is trading on cryptocurrency exchanges successful for some traders and collapsing for others? In most cases, the cause of losses is ill-considered actions, vague strategy selection, choice of questionable trading platforms and the desire for quick profits.
Study, try, in the beginning, risk only the money that you are ready to lose. Cryptocurrencies have a great future and no one argues with that.
And may the profit come with you!