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Crypto Exchange – How Does it Work?

Crypto Exchange – How Does it Work?

Technology will be one of the defining characteristics of our future and whether people agree or not, it will shape every sector of the economy. In the world of investing, it already plays an important role, since more than 70% of the trading (on FOREX, stock markets, commodities) is currently done by algorithmic programs.

Changes are expected to advance further and not only the trading activity will be the one impacted but the actual financial assets themselves. Most of the financial transactions are already done through electronic channels, but a new type of money appeared in the form of cryptocurrencies.

Decentralized, transparent, and independent of any central bank or public institution, cryptocurrencies continue to gain in popularity nowadays and thus bring with them the necessity of exchange platforms.

Since we’re talking about an industry which is still in its early phases, not all cryptocurrency exchange platforms are created equal, which is why we’ll dig deeper into the subject and explain why people exchange cryptocurrencies, how many types of exchanges you can find at the present time, how can you spot an exchange compliant with regulation, and what safety measures you need to take in order to be protected while you exchange crypto.

Why exchange cryptocurrencies?

People exchange cryptocurrencies for different reasons, but from our point of view, we can break things down into three:

  • Acquisitions
  • Speculations
  • Investing
  1. Acquisitions – people use cryptocurrencies to purchase goods and services from stores that offer support for crypto payments. The appearance of cryptocurrency had been a huge advantage for people living in less developed countries (called by some experts “unbanked” people), where banking fees are high and financial transactions take a long time to process. They receive a salary in fiat money, like anybody else, and in order to buy cryptocurrencies, they need to go to an exchange platform.
  2. Speculations – if you say cryptocurrencies most of the experts in the field will think about volatility (which is the aggressive price movement over a defined period of time). The prices of cryptocurrencies fluctuate a lot, which leads to potential profits (or losses) for people who want to speculate and make a living from price differentials.
  3. Investing – although it is generally a strategy adopted by institutions, any people can invest in cryptocurrencies. It means buying and holding cryptocurrencies for a longer period of time, due to trust in the underlying company or project.

The idea behind cryptocurrency exchanges

Since we are talking about the cryptocurrency market, we need to talk about supply and demand. A cryptocurrency exchange is basically a place where sellers and buyers meet and exchange with one another the assets they want to sell with the ones they want to buy.

It is also a place where based on the variations of supply and demand quotations for any given cryptocurrency pairs are being calculated, using an algorithmic program. When the demand is bigger than the supply, prices tend to rise, faster when the imbalance is significant and slower when both are relatively equal. Price tends to fall in the opposite scenario when supply is bigger than the demand.

Some people might ask if it won’t be possible to find someone willing to buy what you are trying to sell. Yes, it is, but the exchange platform, for a small fee, is simplifying the process and you are 100% certain you will receive your tokens.

Different types of exchanges

If you do a little bit of research, you will notice that most of the top cryptocurrency exchanges by daily volumes have the same operating structure: they are all crypto-to-crypto exchange platforms. The problem with this type of exchanges is that most of them are not licensed or regulated since all transactions are made using cryptocurrencies. Considering there is no country that had created an agency or institution that should review all transactions and there is still unclarity in terms of regulation, crypto-to-crypto exchanges might not be the best choice.

On the other hand, there are exchanges that offer not only crypto-to-crypto services but also crypto-to-fiat. Since we have fiat transactions into the equation, exchanges need to comply with regulation and get a license. An exchange that supports crypto-to-fiat transactions is in full-compliance to AML laws and have a KYC process in place.

Exchanges and security

Various exchange hacks had shaken the world of cryptocurrencies in the past two years and now people wanting to invest in crypto pay huge attention to security features. That’s the main reason why 10ex had introduced a brand-new feature called “deep freeze” storage.

It means that most of the crypto funds deposited by customers are being held in multi-signature wallets with private keys stored in different bank vaults. No single person has access to more than one key and spending any crypto coins from the “deep freeze” storage requires a coordinated effort with multiple layers of encryption and security checks.

In order to facilitate instant withdrawals, the exchange also uses multi-signature hot wallets, so clients can make withdrawals with ease.

Strategies for using cryptocurrency exchanges

When it comes to using exchange platforms, people generally choose to use a single exchange they like the most. However, each platform has strengths and weaknesses – on some, you will see that it is better to trade particular cryptocurrency pairs, while others focus on totally different assets.

That is why it is much better to make yourself a strategy, choose a few cryptocurrency pairs that are trending and that is suitable for you, and then search for the exchanges that offer the best conditions.

This is an important factor also for diversification purposes. Maybe an exchange will face technical issues. If all your tokens are on one platform, all your funds will be locked until the problems will be solved. On the other hand, if you own multiple accounts on different exchanges, you could still continue to trade, despite some short-term technical issues.

Another important mistake people make is keeping all of their funds in the wallets provided by the exchange. For security reasons, you need to have a hot wallet or hardware wallet (if you can afford it, much better) that is not linked to your exchange account.

You must also be fully aware that since you make digital transactions, your PC, laptop, smartphone or tablet, will need to carry an antivirus app and run one of the latest updated operating systems.