Crypto Exchanges – How do they work?

The cryptocurrency market is valued at over $2tn and continues to grow. More people are demanding digital assets and decentralized finance (DeFi) services. The increased demand has led to the creation of thousands of coins, which exchanges make available to traders and investors.

These cryptocurrency exchanges allow users to connect and trade various assets easily and quickly. But how do crypto exchanges work, and what should you consider when choosing one? This detailed guide explains everything you need to know.

Common Way Cryptocurrencies Are Used

• Investing

Probably the most popular way that crypto is used is as a vehicle for investment. This involves the strategic purchasing of a number of digital currencies.

Speculating on an increase in its value before selling and reinvesting. Due to a history of high reward returns –especially in the early stages of a currency’s life cycle– it became very popular, but a volatile market is not for the faint-hearted, and the sword is most certainly double-edged.

• iGaming

With the increasing interest in crypto and a global rise in online gambling, it’s hardly surprising that the two have come together.

Whether you’re looking to play slot games or place a bet on a sportsbook, most platforms now accept some form of cryptocurrency. But it’s important when looking for great cryptocurrency casino sites to carefully read reviews from trusted sources and check for valid and up-to-date gambling licenses before placing a bet.

• Goods and Services

Thanks to its quicker transaction speeds (when compared with traditional banking systems), lower fees, and improved security, the trade of goods online quickly adopted cryptocurrencies. Transactions are almost instant and operate 24/7, a key factor when comparing speeds with traditional banking systems (which are often hindered by holidays, weekends, and closing hours). Payments are more secure.

Using a mixture of cryptographic encryption methods, payments become more difficult for hackers to manipulate, and once a transaction is completed, it cannot be reversed.

What is a cryptocurrency exchange?

Also known as a Bitcoin exchange, a crypto exchange is a digital platform that connects buyers and sellers to allow them to make trades. Similar to the stock exchange, traders and investors can visit a trading platform to trade assets such as Bitcoin and Ethereum, so the concept behind Bitcoin exchanges isn’t new.

Most of these exchanges provide their users with mobile applications or desktop websites where they can exchange coins from anywhere in the world, allowing global access to cryptocurrencies.

You’ll also discover that many of these platforms support and educate traders using various tools. These include crypto charts, market updates, analyses and valuable learning resources.

Exchanges offer investment opportunities aside from buying and selling crypto assets. For instance, you can borrow or lend coins on an exchange to trade with leverage or earn interest on your holdings.

Types of Cryptocurrency Exchanges

Hundreds of crypto exchanges exist, but they can be divided into two broad categories: centralized exchanges (CEXs) and decentralized exchanges (DEXs).

Centralized exchanges (CEXs)

Centralized exchanges are the most popular among traders and investors. They act as intermediaries that connect people buying and selling cryptocurrencies. However, they work similarly to traditional stock exchanges as they are regulated or monitored by government authorities, such as the Securities and Exchange Commission (SEC).

Traders choose CEXs due to their great liquidity and speedy transactions. However, CEXs manage and secure your coins for you. They don’t give you access to your private keys, which exposes you to security risks such as hacks and fund mismanagement. This means choosing a reputable one is of paramount importance.

Decentralized exchanges (DEXs)

Unlike CEXs, a decentralized exchange embraces decentralization, which is the essence of cryptocurrencies and blockchain technology. A DEX lets buyers and sellers connect to trade digital assets without any entity controlling their activities.

In other words, DEXs are completely autonomous. They let you control your private keys and manage your assets independently, offering stronger security and privacy. However, DEXs have lower liquidity, which may cause delayed transactions.

How do crypto exchanges work?

Understanding how crypto exchanges work is crucial to your trading journey. Interestingly, these platforms are not complicated. They are online marketplaces with the goal of matching buyers and sellers for crypto trades. However, CEXs and DEXs differ slightly in how they operate.

A CEX typically works as follows:

• Create an account with a trustworthy exchange. You’ll typically need to provide personal information, such as your full name, email address, phone number and location.
• Complete the identity verification step, also known as the Know Your Customer (KYC) process by submitting the required identity documents or proof of address. This verification is mandatory as part of the exchanges’ compliance with regulators’ anti-money laundering (AML) policies.
• Fund your account with the supported fiat currencies or cryptocurrencies after verification.
• Place your first trade after a successful deposit. This process typically involves searching the exchange’s markets for the cryptocurrency you want to buy, entering the amount and confirming the transaction.

A DEX typically works the following way:

• Create a crypto wallet compatible with the platform. These wallets allow you to store your assets online or offline. Popular examples include MetaMask, Trust Wallet, Ledger and Trezor.
• Deposit funds in your wallet by transferring coins from your exchange account or another wallet to the self-custodial wallet.
• Connect your wallet to the DEX website or mobile app. This process involves visiting the website, selecting your wallet type and approving a connection request.
• Place your first trade after the wallet has been connected successfully. Typically, you’ll browse through the available coins, choose the one you want to swap the assets in your wallet with, and then complete the exchange.
  

Things to look out for when choosing a Bitcoin exchange

Many exchanges parade themselves online as legitimate; however, some are fraudulent platforms that can defraud you of your money, while others may be less than secure and expose you to hackers.

For example, the FTX collapse was a result of the company’s poor practices. This means it is essential that you pay close attention when selecting an exchange to avoid regrets.

Here are some important steps to take before trading on an exchange:

1. Verify that the exchange is registered and has an operating license
2. Check that the exchange is available to US customers
3. Confirm that the platform has a verifiable social media presence
4. Read through online reviews on sites like Trustpilot and the App Store, just like when choosing a crypto betting site.
5. Understand how the exchange safeguards users’ funds
6. Locate the exchange wallet and test it with a small amount before depositing your capital

In addition to the security measures above, it’s crucial that you review the available assets to determine if the exchange suits your needs. You should also understand its fee structure to ensure you have an affordable option.

Conclusion

Cryptocurrency exchanges offer an easy way to buy, sell and invest in Bitcoin and other assets. While there are hundreds of options on the market, keeping the details above in mind will help you choose reliable ones. Prioritize only exchanges with valid registration, high security, low fees and a decent range of assets.