How Does a Crypto Exchange Work? A Beginner’s Guide
To put it in simple words, a crypto exchange is a platform where investors deal in crypto coins. Anybody who is interested in joining the blockchain market and trade in crypto has enrolled themselves in the cryptocurrency exchange. The reason behind trading in a specific crypto exchange is the unavailability of recognized trading companies that have registered cryptocurrency as an option for business.
If you are one of those people who are new to the crypto market and are curious about investment opportunities, it is important for you to know that crypto exchanges are of 3 kinds. These names of the trading crypto exchanges are hybrid, centralized, and decentralized. People also trade on applications that offer crypto trading as well. Peer-to-peer trading is another stage for one-to-one crypto investments. Each type of crypto exchange has different attributes, but that will be discussed in the latter part of the article.
This will be a guide article for people who are keen to explore the possibilities that the crypto market can offer. We will elaborate and list the types of cryptocurrency exchanges. We will also be touching on the topic of crypto wallets and their proper use. The aim of this guide article is to dive deep into the world of crypto and tell you which things to avoid and pursue while choosing a crypto exchange for trading purposes.
Understanding Crypto Exchanges
The first step in crypto trading is registering on a crypto exchange platform. Signing up on a crypto exchange will allow you to buy and sell a wide variety of crypto tokens. The most prominent cryptocurrencies are Bitcoin, Ethereum, ADA, Dogecoin, HBAR, ENJ, etc. The currency used in such crypto exchanges is one that is not backed by a commodity. US Dollar is one of the most commonly used currencies in blockchain networks. Crypto investors can also trade tokens of a cryptocurrency for another cryptocurrency. Using crypto exchanges is not really complicated and actually gives a lot of flexibility to the user with its multiple trading options.
As already mentioned above, each crypto exchange offers a vast number of cryptocurrencies to traders, but it does not necessarily mean that one crypto exchange would have all the cryptocurrencies available that exist on the planet. Some of the coins that are available on Binance might not be available on Kucoin. For Instance, a DeFi coin (a decentralized coin) YFI is not available to trade on Binance, but KuCoin users are given the luxury of trading YFI. Although a popular crypto exchange claims to have the majority of cryptocurrencies, they might also lack the crypto coin which you were planning to invest in. Hence, it is important that you research these exchanges and crypto coins before registering on any of them.
Two major options are usually available and are most commonly used in cryptocurrency exchanges are either government-issued currencies not backed by gold (fiat currencies) or crypto coins themselves. US dollar is generally adopted by the majority of users to sell or buy crypto tokens. The general trend is that people buy a cryptocurrency then sell it for USDT. The money earned by selling that particular coin can be withdrawn in real cash or used further in buying another cryptocurrency. Although, it is crucial to note that the trading options are not consistent in all the investing platforms on the globe. There are some crypto trading apps that do not offer the freedom to transfer your crypto coins to any other space.
The major benefit of crypto trading exchanges is the luxury of buying or selling coins at any time of the day or week. The trading platforms other than crypto do not offer such an accommodation to their users or investors.
Guide for a Beginner
Trading on a crypto exchange will firstly require you to set up an account on any investment platform offering crypto trade. The second thing is that you will have to put some dollars in that account. This account will act as your crypto wallet, allowing you to trade crypto coins with the cash it holds. A crypto account or wallet that is set up on a specific crypto exchange is locked in that exchange only. For security measures, crypto wallets should be signed up for.
Crypto prices and costs fluctuate in crypto exchanges. As we all know, cryptocurrencies are extremely volatile. The crypto market and blockchain networks influence the coin’s prices. Crypto exchanges are chiefly up-to-date with the values of each token, but a tiny lag or deflection is expected because of the decentralized nature of the cryptocurrencies.
To start trading on a crypto exchange, you apply to purchase the coin you desire. Your offer will be recorded in the encrypted data of the blockchain network with the rest of the crypto investor’s offers. Crypto exchanges and their guides require a certain share of the trade you are applying for. These facilities are not free and can take about five percent of your business deal in some exchanges. But again, the prices and costs vary in all crypto exchanges.
Crypto Wallets and Crypto Exchanges
Crypto wallets and exchanges work simultaneously in order to proceed with trading successfully. But, that does not mean they are the same thing. Crypto wallets can be defined as a secure warehouse where you transfer and hold your crypto, while the crypto exchange is the market where you buy and sell crypto. Although, understanding the science behind crypto wallets is important in order to understand the nitty-gritty of their functions.
Crypto markets and blockchain networks are the one-stop for crypto investments, but trading crypto is not that simple. Crypto wallet is one tool that paves the path between you and the decentralized crypto network.
Crypto wallet consists of computerized software that creates two coded messages when you sign up for a crypto exchange wallet. These messages act as keys for opening the door of your crypto wallet whenever you are transferring or accepting crypto coins. This software helps you in organizing and controlling your crypto market accessibility and wallet.
There are two types of wallets that can be created. A hot wallet is one that is online and can operate on inter-linked computers. The second wallet, the cold wallet, is one that is more of a private storage device that does not appear on the internet at all.
Just like crypto exchanges, crypto wallets also have a limit on the kinds of crypto tokens they can possess. Make sure you have the right information before setting up a crypto wallet.
One of the benefits of limiting and storing your owned coins is that you can control and organize them conveniently without any fuss. But consequently, it can limit your trading avenues and also endanger the safety of the stored coins. Crypto exchanges are prone to hackers and invaders because of their hefty values.
The constant danger of a cyber attack can be stressful for the user. The lack of insurance policies in an unfortunate case of a cyber-attack adds to the anxiety and stress of the user. Cryptocurrency is still in doubt in many countries, and the sudden shutdown of the whole operation can result in the complete loss of your crypto tokens. In 2021, people saw the closure of 2 crypto exchanges, and the fate of the investors who kept their coins in the exchange was brutal.
To save yourself from such drastic fates, it is important that you consider registering for a crypto wallet. Many crypto traders deem it difficult and complex to make a crypto wallet account, but it provides a solid wall against hackers who are trying to steal your crypto assets.
Different Kinds of Crypto Exchanges
Centralized Crypto Exchanges
This type of exchange has a supervisor who overviews each trade and deal. The responsibility of the broker is to aid the transferring of crypto tokens and ensure that they reach their prescribed destinations safely.
Although, such a system of exchange kills the whole ideology of the crypto blockchain without the interference of any third party. Crypto exchange’s pride is in the whole regulation of trades in the absence of authority, but such an operation gives you the liberty to purchase the cryptocurrency of your choice with the normal currency other than the fiat currency.
As not everything is perfect in the world, centralized exchange exposes valuable coins to a hacker because of its centralized nature of being controlled with the aid of an individual body.
Decentralized Crypto Exchanges
Unlike centralized crypto exchanges, DEX is the reflection of a true blockchain exchange that regulates the tokens without the aid of a government-approved authority. It gives investors a free hand and lets buyers and sellers decide the outcome of each trade.
DEX or Decentralized exchange turns out to be rather secure compared to a centralized crypto exchange. The lack of a body overviewing and controlling each trade eliminates the possibility of an uninvited cyberattack. Moreover, this is not the only advantage that the Decentralized exchange has over the centralized exchange. The service charges are significantly less in DEX. Furthermore, the transferring of crypto tokens demands remarkably less time.
You might be thinking that if the decentralized exchanges for crypto are far better than the centralized exchanges, why should you even bother the former option. Well, centralized exchanges also have some privileges that are non-existent in the network of DEX. To trade in a decentralized exchange, you will need some technical training and knowledge. Unlike centralized exchanges, DEX does not offer users the liberty and luxury of using banks and visa cards to initiate a trade in crypto.
There are a few decentralized exchanges in the crypto market that does not approve of fiat currencies which leaves you to trade with only the coins you have in your crypto wallet. The lack of insurance for crypto assets and a third party can leave you in a helpless state if you ever run into a difficult spot.
Hybrid Crypto Exchanges
The third and last of the types of cryptocurrency trading platforms is the hybrid crypto exchange. As the name itself suggest, this crypto exchange is a mixture and combination of decentralized and centralized crypto exchanges. The outstanding ability of this platform is the user-friendly nature (in the centralized exchange) and the liberty (in the decentralized exchange) that it provides to its consumers. The solid security of hybrid exchange cannot be overlooked as well.
The attributes of the hybrid crypto exchange are fantastic, but the practical world has not realized and accepted this style of exchange. Nevertheless, the future can be bright for the operation and adoption of the hybrid exchange, which would make the life of crypto investors much easier.
Screening Process While Selecting a Crypto Exchange
It is important for you to know some things when entering the complex world of crypto trading. The crypto exchange you trade on impacts your crypto asset in more ways than you can imagine. Hence, below are some of the things that you need to ponder before deciding on a crypto exchange to start your crypto trading career.
The boundaries of the crypto exchange tell a lot about their priorities and goals. If you pick an exchange that does not have your country on their list, then avoid it. Crypto exchanges are very careful when selecting the geographical locations to consider for a business. The locations that land in their jurisdiction are their preferable audiences. Hence, it is crucial that you look out for an exchange that deems you a priority.
The prominent and popular cryptocurrencies are available on every other exchange that is out there in the crypto market. The likes of Bitcoin and Ethereum can be traded everywhere. The problem with investing and holding such big cryptocurrencies is that you will have to invest in large numbers. Not everyone has big bucks to put at stake. Ultimately, people with small reserves dig out cryptocurrencies with smaller market caps but have the potential to reach double or triple the value of its original cost at the time of investment. Thus, you should consider and narrow down only those crypto exchanges that offer a wide variety of coins with the potential to go airborne when the time comes.
All the cryptocurrencies that are in existence will take pride in their services. The notable thing is that each exchange might offer the same number of services but will charge you differently. So, your decision to choose a crypto exchange can either uplift your earnings or reduce them significantly. There are crypto trading platforms that charge for services that are never in effect. Sometimes, a crypto exchange might charge you more, but they will also provide the best of tools and a strong security protocol to ensure that nobody invades your crypto wallet.
Your crypto wallet is the most important thing when you are in the middle of a transaction. If there is even a tiny possibility that a hacker might steal your coins, then you are doomed. Always make sure that the security is strong enough to keep your mind in peace when making impactful decisions in the crypto market. If security is a major priority for you, then decentralized exchanges should be preferred. To narrow down exchanges easily, lean towards more popular platforms that have the highest number of users logging in daily.
Conclusion
From the reading point of view, crypto exchanges and trading might seem simpler than it is. The world of crypto is more than just buying and selling cryptocurrencies. It is a subject in itself that demands in-depth research and study to succeed. Where the volatile nature of crypto has rewarded the brave people, it has also taken thousands of dollars from people who were called stupid instead of brave afterward.
The idea is not discouraging the reader but motivating them to be more careful. Most of the people that are attracted by the real of crypto are the ones looking to get rich quickly. While the nature of crypto might seem readable, its inconsistency and sudden change of trends can deceive the masses. Hence, the guide article is written in order for you to make the right decisions before entering the crypto market and also make sure that you have covered all the bases.
The bright side is that more and more industries are recognizing the potential of cryptocurrencies every day. The field of crypto trading is getting convenient day by day for the newbie. More research is being done on the attributes of the crypto market and blockchain networks that offer the reader a hefty amount of data to learn from. Crypto investors who have seen major tides of the industry are sharing their valuable experiences, which are easily obtainable. The only thing you need to do is make up your mind and follow the guidelines offered in this article to succeed in the crypto market like thousands of others.
