The principle of cryptocurrency exchanges

Thanks to crypto exchanges, we are not limited to using a specific cryptocurrency, but have the opportunityexchange it for others. In this article we will look at the concept of a crypto exchange, its operating mechanism, risks and benefits.

What is a cryptocurrency exchange?

Cryptocurrency exchange – online platform,which specializes in exchanging one cryptocurrency for another. Some exchanges also allow you to trade for a specified currency based on the market value of the asset.

Moreover, since most exchanges todayhave built-in wallets, it is possible to send funds from the platform to another. Thus, users are not limited to storing funds within one platform.

There are three types of crypto exchanges on the market:

Traditional trading platforms (Binance, Kraken, Okex, EXMO, Coinbase);

Direct Trading Platforms (Waves DEX, Binance DEX, Bishares, Bitsquare);

Cryptocurrency brokers (BitForex, Bybit, Currency).

In the case of traditional trading platformsbuyers and sellers can trade funds based on current market prices. The exchange acts as an “intermediary,” and in most cases it charges a transaction fee.

Direct trading platforms – Thispeer-to-peer online platforms where buyers and sellers trade without intermediaries; this type does not use fixed market prices and sellers usually set their own exchange rates.

Cryptocurrency brokers – Thisonline platforms that allow buyers and sellers to trade cryptocurrencies at the market price for a small premium. The exchange occurs between the buyer or seller and the broker, and not directly between the buyer and seller.

Centralized and decentralized exchanges

There is an opinion that trading on centralized exchanges directly contradicts the philosophy of most cryptocurrencies – decentralization.

However, it was centralized exchanges that didcryptocurrencies available. Plus, they bring much-needed liquidity to fragile crypto markets. However, these centralized exchanges do not allow the user to have complete control over their private keys. Let's remember that over the past couple of years, centralized exchanges have been repeatedly attacked, resulting in billions of dollars worth of cryptocurrency losses.

In order to somehow prevent fraud, centralized exchanges took various measures KYC (know your client) and AML (anti-money laundering).

Decentralized Exchanges (DEX), on the other hand,more private. They do not request personal information, ID, or other KYC / AML procedures. That is why some traders prefer them.

The main advantage of decentralizedtrading platforms is that they do not need intermediaries. However, the user of a decentralized cryptocurrency exchange bears full responsibility for his actions and the safety of his own funds.

The absence of an intermediary provides another advantage – low or non-existent trading fees.

All this is good, but let's not rush to conclusions. Decentralized exchanges have their drawbacks.

DEX is only available to people who are alreadyare present in the cryptocurrency ecosystem. And since they serve a smaller audience, their trading volumes are usually lower than those of centralized exchanges. This means that liquidity levels are not so high (low trading volumes make it difficult to sell cryptocurrencies and transfer to cash).

Decentralized exchanges usually do not offer the same advanced functionality as margin trading, stop loss, etc., if there is a less convenient interface.

What are cryptocurrency trading pairs?

In the world of cryptocurrencies, the term “trading pair”describes a transaction between two types of cryptocurrency. For example, one of the most popular trading pairs on all exchanges is the ETH/BTC trading pair. This pair allows you to buy BTC using ETH (Ethereum) or sell ETH for BTC.

Cryptocurrency trading pairs allow users to profit from changes in the exchange rate, and they are the main source of profit for many crypto traders.

Cryptocurrency Trading Basics

Entering the cryptocurrency trading market is scary, but if you do it gradually, you can easily understand all the nuances of its work.

The first thing you need to do – Thiscreate an account on a cryptocurrency exchange. After this, you should make the first deposit into your wallet using one of the payment methods supported by the platform.

Crypto trading – This is a speculative business, so it is important to remember that you can lose everything. It is recommended that you never trade or invest more than you can afford to lose.

Most of the risks associated with cryptocurrency trading are related to two things: security and regulation (or lack thereof).

Better to choose platforms that store depositsin the “cold” storage (offline, out of reach of potential hackers), have two-factor authentication, as well as encryption and email verification.

After all, there are many risksrelated to cryptocurrency trading. Therefore, it is important to conduct your own research and learn as much as possible about the crypto exchange that you plan to use.