Crypto exchanges: how do they work?

Crypto exchanges: how do they work?

Reading Time: 4 minutes

When you go on holiday to a foreign country, you go to your bank and change your money for the foreign currency. Or if you’re more adventurous, you wait until you are at your destination and go to a currency exchange. You hand them your money, pay a fee, and get the local currency in cash.

Most of the times, these places have exchange rates that are more profitable for them than for you. So what about exchanging cryptocurrency? What are crypto exchanges and how do they work?

What are cryptocurrency exchanges?

At a cryptocurrency exchange you change between different currencies. Most of these allow the changing of one cryptocurrency with another. Some even let you use fiat money to change into digital money and vice versa. These exchanges work with the bid ask spread. This is the difference between the price of a purchase and a sale. Imagine you want to buy a Bitcoin. You obviously want to buy it as cheap as possible. Someone willing to sell you this Bitcoin won’t give it away for free though. They want to make as much as possible with their sale. A purchase takes place when your offer matches the asking price of a seller.

When a lot of people want to buy the same type of coin, the price will go up. All the lowest asking prices will be met first, leaving the more expensive offers on the crypto exchange. So if you still want to buy that coin, you will have to pay more the longer you wait. On most exchanges you can set a maximum price you are willing to pay. So when the offers all drop, as soon as someone matches your maximum price, the purchase will take place.

The same goes for when you want to sell your coins. You can decide what the minimum price is you want to sell for and as soon as someone is willing to meet that amount, you automatically sell your coins. If you ask too much it will be harder, if not impossible, that someone is going to offer that price. It pays off to keep a close eye on the market of the coins you own or want to buy.

What to look for in crypto exchanges?

Most people will start their experience with cryptocurrencies using websites such as Coinbase or Bitstamp. These are brokers rather than exchanges, as you will be buying the coins directly from them rather than from other people. These brokers let you use dollars or euros to buy the bigger cryptocurrencies such as Bitcoin, Ethereum, and Ripple.

What to look for in crypto exchanges?
What to look for in crypto exchanges?

If you want a more specialized coin you will have to create an account at one of the many exchanges. Not all exchanges offer the same coins, so it is useful to check which company you will need. Websites such as coinmarketcap are handy for this. It shows you the exchange rate of almost 2000 coins, and also which exchanges do business with them.

In order to use the exchanges, you will have to create a profile and provide personal details. You want to make sure that you can trust the site before handing them all that information. Have a search on the internet about an exchange and check its safety ratings before opening an account. Another thing to look out for is the amount of transactions taking place. The more movement on the exchange market, the better. It means people trust it enough to use it. Once you are sure about the safety of the exchange, you want to look for the one with the lowest exchange fees. If you want to do a lot of business, it can become quite expensive if the exchange fees are high.

Finally, a good thing to look at is the possible trading pairs. Which coins are exchangeable with each other? If you have Ripple and want to buy Ethereum, it is neat if the exchange offers a direct pairing. Otherwise, you will have to change your Ripples for Bitcoins, and then change the Bitcoins for Ethereum. This means extra fees, extra work, and extra risk in case of strong price fluctuations.

Binance and Bittrex

Some of the most popular crypto exchanges are Binance and Bittrex. The former offers 380 coin pairings, meaning you can trade in that many ways. You will have to import previously purchased cryptocurrency to do business though. Binance won’t let you use fiat money such as dollars or euros. Bittrex has more than 190 different coins on offer via their website. Most of them are paired with Bitcoin, but there’s a quite some exchanges possible using Ethereum as well. Unlike Binance, it is possible to use US dollars to buy coins on Bittrex as well.

There are many exchanges out there and if you want some specific coins, you will need to create an account for an unknown exchange. Once again, make sure you can trust the site before entering any personal data!

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