Crypto Exchange Platform – How It Works?
Just after the first cryptocurrency (Bitcoin) appeared, the only way to own it was by mining it. Later, you could buy it from some holders directly. Usually, you had to agree on a meeting place and you used to pay for the digital coins with cash. But such an approach was not safe. Things have changed for the better. Nowadays, buying cryptocurrencies is very easy through a crypto exchange platform.
But, what is a cryptocurrency exchange? And, how does it work? We will answer these questions in this article. Let’s begin with the definition. An exchange, or more formally a digital currency exchange (DCE), is a software platform that facilitates the trading of cryptocurrencies and other assets. The most common operations that crypto exchanges offer are:
- Fiat money to a cryptocurrency exchange. It is commonly referred to as buying crypto. For example, you exchange US dollars for Bitcoin (BTC). In this case, the purchased cryptocurrency is sent to the user’s digital wallet.
- Cryptocurrency to fiat money. The inverse operation to the one described above. In this case, the fiat money goes to the user’s bank account. However, because of local regulations, not all banks accept money that had an association with cryptocurrencies. Some exchanges also limit the amount of fiat money that they can send to a bank account.
- Cryptocurrency to another cryptocurrency. With hundreds of cryptocurrencies available, it has become more common to exchange between them. BTC to Ethereum and BNB to Matic are some examples of these operations.
Not all crypto exchanges have the same features. Some of them are more suitable for beginners whereas others feature advanced functions for experienced traders.
Stock Exchanges and Crypto Exchanges
Crypto exchanges are in a way similar to stock exchanges. Traders buy assets and sell them at a higher price to make a profit. In principle, crypto traders do the same. However, because of the volatility of the crypto market, trading is done within a short time. In some cases, a crypto trader may buy an asset to sell it just a few minutes later. But unlike stock exchanges, crypto exchanges operate 24/7. They are open 365 days a year.
Crypto Exchanges Don’t Set Their Prices
Contrary to popular belief, a crypto exchange doesn’t set the price of a cryptocurrency. The market does. There aren’t official global prices for cryptocurrencies. The price of a particular cryptocurrency depends on the interactions between sellers and buyers. Other factors also affect the price of crypto, but the selling-buying activity is much more important. Each crypto exchange determines the price of a digital coin based on its trading volume. In most cases, supply and demand also play a role in setting the price.
How Crypto Exchanges Make Profits
The most common way to make a profit is by charging trading fees or commissions. It is common in both stock and crypto exchanges. The trading fee is paid for the service that facilitates the interaction between seller and buyer. In general, these fees are low (as low as 0.1%), which helps to increase trading volume. Other ways of making money include listing fees, initial exchange offerings (IEOs), initial coin offerings (ICOs), security token offerings (STOs), and market-making.