The world of cryptocurrencies is very diverse and its market is very big. One of the most important parts of this market, is crypto exchange. In this article we will define crypto exchanges, introduce the types of exchanges and talk about their application and features.
So if you still have not read the article on cryptocurrencies and blockchain, read the articles below and then come back and start this article.
What is blockchain?
what is crypto exchange?
The first crypto exchange was established in Australia in 2004 but was shot down due to not having a license and enough customers. In 2006 another digital currency exchange was shot down in America by the US security service. It was run by two persons who tried to transfer over 30 million dollars in the form of cryptocurrencies illegally. In the first years of blockchain technology and cryptocurrencies coming into light, these platforms were unknown and therefore were not profitable or they were shot down by the law. However, the era cryptocurrencies have emerged and digital exchanges are now very popular in almost all countries.
crypto exchanges or as they are known, digital currency exchanges (DCE) are a type of modern business which provides an appropriate place to trade cryptocurrencies. In digital currency exchanges, different types of coins such as bitcoin, Ethereum, lite coin and … can be traded. There, the digital currencies can be traded with each other or fiat money.
The process of working with one of these exchanges is not very hard. First they need you to prove your identity to them which is done through various methods. Then, after the identification is done, you can start trading by putting buy or sales order with specific prices. You also need to know about the terms that are mostly used on such platforms and study the technical analysis of the crypto world.
Digital coin exchanges are different in function and market cap. Lets learn about the types of these exchanges.
Types of digital currencies exchanges
Most of crypto exchanges are trading platforms acting like a medium between the buyer and the seller. The both parties of a transaction can connect to each other directly and trade what ever amount of cryptos they require. In such P2P crypto exchanges, there is a digital wallet for all supported cryptos so that the users can transfer their assets to their exchange and wallet and trade them or to withdraw what they have bought from the exchange to their personal digital wallet. You can read about digital wallets here.
There is another type of crypto exchange in which the users do business with the owners of the exchange. Such exchanges usually own a small part of the market and can only do business inside the country they have been established, since the users can mostly buy cryptos using their credit cards. However, there are exchanges active in this form which are running internationally.
However, the third type of exchanges are the decentralized crypto exchange which are considered as an important type. Decentralized crypto exchanges are based on blockchain technology and all their tasks are done through smart contracts. We will talk about smart contracts when we are talking about Ethereum and its smart contracts. Decentralized crypto exchanges are not managed or controlled by a specific person or company and no transaction happens having the exchange on one side. On the other hand, all transactions that happen inside them, use blockchain and are done automatically through smart contracts. Yet, all transactions of users are recorded on blockchain.
You can read about the decentralized crypto exchanges here.
Different prices in different exchanges
Since the crypto exchanges work separately and independently, therefore the supply and demand is different in each of them. Furthermore, the price of crypto currencies is in direct connection to its amount of supply and demand so each exchange can have a different price a coin according to its supply and demand. Of course the difference is very small since if there exists a big difference, all traders would rush into the exchange with lower price and the demand would rise up the price.
The global price of Bitcoin and other cryptocurrencies are also determined by their defined prices in biggest exchanges of the market.
Trading currency pairs
Currency pair is formed of two currencies that can be traded with each other. The place where each currency is put matters since for instance you want to check BTC price in exchange for US dollar so your currency pair would be BTC/USD. But if you want to sell BTC for dollars, their places would be different and you have to use the currency pair of USD/BTC.
Or you may want to trade BTC for Ethereum, so you have to use the currency pair of BTC/ETH so that you would know the price of Bitcoin in return for Ethereum.
Crypto exchanges facilities
Each of the crypto exchanges provide you with different features, but almost all of them share some functions.
All crypto exchanges have an inside digital wallet where users can deposit or withdraw their digital assets.
Most of the exchanges provide you with a powerful trading chart with features for technical analysis.
In crypto exchanges, the possibility of stop limit order is provided for the traders. Stop limit buying order is in fact an option which enables the trader to buy an amount of a coin at the price they have set for their stop limit order. The interesting thing is that this process is done automatically. For instance you may predict that the price of a digital coin has exceeded the 20 dollar resistance and will rise up to 60 dollars. Then you put a stop limit order like this:
In this case, if the price of the chosen digital coin gets to at least 21 USD, a buying order will be automatically put by you.
Stop limit sales order is the same. It prevents the trader’s lost to increase from a specific amount. For example, if you predict that the price of a digital coin has passed the 60 dollars support and may fall to 20 dollars, you can put a stop limit sales order as below:
In this case, if the price of the specific digital coin gets down to 57 dollars, a sales order of 58 dollars will be put automatically by you.
So this is pretty much what a crypto exchange is and how it works. Of course, there are a lot more that you need to know. We will discuss decentralized exchanges (DEX) in another article. You also need to know about the process of choosing a trusted exchange. Normally, in choosing an exchange, the need for security is of high priority but other elements such as transaction fees and user interface. You can also read about the best crypto exchanges in 2020 and the criteria to choose one of them in the article below.
Best crypto exchanges in 2021!
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