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How Do Crypto Exchanges Work?

Becoming a cryptocurrency trader is all the rage in the investment world today. Many cryptocurrency traders have already amassed massive fortunes, and that is attracting more and more new people into this space. The key motivation behind crypto trading has to be the potential for stellar upside. Of course, to begin cryptocurrency trading, you need to find the right crypto exchange.

A cryptocurrency exchange is simply any platform that allows you to buy and sell cryptocurrency. If you want to become a crypto trader, you need to do it through a crypto exchange because very few traditional investment firms offer this new asset class.

There are three primary types of crypto exchanges that you could use to trade cryptocurrency, but there are other ways you can buy and sell these digital coins. This post will guide you on how crypto exchanges work and tell you everything you need to know so you can decide on an exchange that’s suitable for you.

How Do Crypto Exchanges Work?

You need to create an account with a cryptocurrency exchange so you can begin buying and selling various cryptocurrencies. Depending on the exchange you choose, you can purchase crypto tokens directly using fiat currency or even trade one type of crypto for another. The larger and more well-established a crypto exchange is, the likelier it is to offer a wide range of cryptocurrencies.

Crypto exchanges let you use fiat currency to buy crypto by depositing the fiat currency amount you want to use for crypto trading and exchanging it for cryptocurrencies of your choice with the same value. These exchanges also let you exchange your crypto holdings for fiat currency or leave it in your account for future trades.

When you create an account with the crypto exchange, sometimes called a crypto wallet, you should know that the wallet is typically held by that platform. We highly recommend having your own crypto wallet outside the platform for greater security.

When you have an account, you can view the prices of different cryptocurrencies. The crypto exchange does not set the prices – they are determined by the market. Most crypto exchanges do their best to reflect the most current prices, but there can be slight differences in prices on various exchanges because cryptocurrencies are decentralized.

Different Types Of Crypto Exchanges

There are primarily three different types of cryptocurrency exchanges that you should be aware of and here’s what you need to know about them.

Centralized Exchanges

Centralized crypto exchanges are similar to traditional brokerages. If you’re aware of the core concepts behind cryptocurrencies, you might think that centralized exchanges defeat the purpose of having a decentralized digital currency because centralized platforms are regulated by a central authority.

However, centralized crypto exchanges make it easier for you to purchase the crypto coins you want with fiat currency. These exchanges are highly targeted by hackers because a centralized exchange holds a significant amount of crypto tokens in one space. The best crypto exchanges deploy highly effective security protocols to prevent theft and data breaches that could lead to the loss of their holdings.

Decentralized Exchanges

Decentralized cryptocurrency exchanges, or DEXs for short, work without the need for a central authority like with centralized exchanges. Instead, a DEX is more of a decentralized and open-source platform in which users trade peer-to-peer in a truly decentralized manner.

Theoretically, a DEX should be more secure than a centralized exchange because no central entity holds all the coins. Hackers cannot target one source to steal all the crypto coins. The transaction fees with a DEX might be lower and process faster than with a centralized exchange.

A DEX may come with a few disadvantages compared to centralized exchanges. Many DEX platforms are more complex and require some technical skills and understanding of cryptos. There are many DEX that don’t offer the option to exchange fiat currency, and you can only use one type of crypto to trade for others. A DEX also doesn’t offer insurance on your funds, and there’s no central authority to contact if you face problems.

Hybrid Crypto Exchanges

Hybrid exchanges are designed to bring the best of decentralized and centralized exchanges together. The goal is to offer the convenience of a centralized exchange with the freedom and security that comes with a DEX. Centralized exchanges continue to be the most popular type of crypto exchange, but it is possible that hybrid crypto exchanges will become increasingly popular in the coming years.

Other Methods To Trade Cryptocurrencies

Trading on cryptocurrency exchanges is not for everyone. Suppose that you are only interested in owning a cryptocurrency token and holding onto it for the long run without any intent to sell soon. In that case, having a technical understanding of cryptos might not be worth your time (although it should be). Another case you might not want to work with an exchange is to retain anonymity. Some major exchanges require sharing some personal information that they can use to verify your identity when you sign up with them. If you don’t want to go that route, there are a couple of options you can use.

  • You can use online trading apps. Several investment apps now allow users to buy and sell cryptocurrency.
  • Payment apps like PayPal and Venmo now let users buy cryptocurrency as well.

However, using these platforms means that you won’t be able to move your holdings off of the platforms. If you are interested in investing in crypto but don’t want to reveal your identity, you can consider using peer-to-peer exchanges that let you trade fiat currency for crypto coins with others without the need for intermediaries.

Wrapping It Up

Understanding how crypto exchanges work seems pretty simple. It is a platform that lets you purchase and sell various cryptocurrencies. But that doesn’t mean you can blindly trust any crypto exchange with your money. The crypto world is still relatively new and requires a lot more scrutiny on your part so you can avoid scams.

As more regulations and a better overall framework continue to develop, things might change in the way they work in the cryptocurrency world. It’s important to spend some time to understand the foundations and grasp the basics about cryptocurrency trading to stay atop of things as they keep changing.

If you found this post on how crypto exchanges work helpful, you’re in for a lot more. Keep following our blog to read more useful posts about the cryptocurrency world that can help you make more well-informed trading decisions.

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