HomeBlogCryptoWhat is a crypto exchange, and how does it work?

What is a crypto exchange, and how does it work?

Crypto exchanges are rising in popularity over a few years as the adoption of cryptocurrency, and other digital currencies are increasing rapidly. As the popularity of cryptocurrencies grows, the number of crypto traders is also expanding. 

What is a crypto exchange?

Traders or investors can’t buy cryptocurrency from an investment firm or banking institution. Once you decide to invest in cryptocurrencies like Ethereum, Bitcoin, or any other cryptocurrency, you must first register a crypto account on a particular crypto exchange site to convert your fiat currency into a digital asset. A crypto exchange is a platform that enables people to buy and sell cryptocurrency. You can buy any cryptocurrency of your choice with your fiat money and convert Bitcoin into Litecoin. You can see the updated price of all the cryptocurrencies on the crypto trading site.

How does our crypto trading platform function?

A crypto trading platform or exchange is a marketplace that enables people to purchase as well as sell cryptocurrency and even convert their cryptocurrency into Fiat money. They perform this function with the help of a live order book. The exchange rate of every cryptocurrency is affected directly by the live purchase and sell orders of the order book displayed on the site. A cryptocurrency exchange with more buyers will provide more prices relevant to the market since every exchange decides its price based on its trading volume. This is why you will notice small differences in the price of Bitcoin or any other cryptocurrency on various crypto exchanges.

Buying cryptocurrency

In case you have made an informed decision about investing in a cryptocurrency, you must first choose the crypto exchange platform and register an account on that trading platform. You must follow the KYC rules and create a wallet to transfer your fiat currency. You can buy and trade the cryptocurrencies listed on the trading site with your fiat money. While choosing a crypto exchange, you must check all the exchange details and ensure that the exchange deals with the cryptocurrency you want to invest in. On executing the transaction, the cryptocurrency will be transferred to your wallet, and then you can sell the crypto for another cryptocurrency on the exchange

How does cryptocurrency exchange make money?

Cryptocurrency exchanges are of two types- centralized crypto exchange and decentralized crypto exchange. A centralized cryptocurrency exchange is an intermediary between crypto buyers and sellers such as Coinbase, Gemini, etc. On the other hand, a decentralized crypto exchange provides noncentralized services where parties manage their assets. For example, Sushiswap and Uniswap 

Centralized exchanges make money by charging commission fees on their platform. This commission rate is predetermined and can be as high as 0.1% of every trade. 

Because of stiff competition, a new crypto exchange may suffer from low liquidity during market consolidation, so they impose listing fees on the tokens or coins they want to list on their platform. It is another source of income for the trading platform apart from the commission fee. To promote their platform, many exchanges offer native exchange tokens and reward token holders on their platform with some fee reduction. Decentralized apps and smart contracts are used for automatic transactions in decentralized exchanges.

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