How digital exchanges work

It seems that everyone is using cryptocurrency exchanges, but if you are someone that is new to the whole concept, you might be a little confused. In this guide, will give you a full, clear, and succinct explanation of what cryptocurrency exchanges are and how they work.

Put simply, a cryptocurrency exchange allows the exchange of one cryptocurrency for another, the exchange of a cryptocurrency into fiat currency or vice versa, or the buying and selling of cryptocurrency.

A cryptocurrency exchange will typically set the rate of each currency – both coins and tokens and the rate will usually depend on the actions of the buyers or sellers as well as various other factors that can impact the price.

Different cryptocurrency exchanges will have different options; some are made for traders whereas some are made for prompt crypto-fiat exchange, others are made for regular traders where you can buy crypto and sell them for a lower fee than on a typical crypto to fiat exchange. Most trading platforms also charge an additional fee depending on the amount of money that you are withdrawing from the account.

A cryptocurrency exchange works in much the same way as a regular stock exchange but the difference is that on a stock exchange, a trader will buy and sell assets whereas, on a crypto exchange, a trader will use crypto pairs to profit from their volatile value rates.

What are cryptocurrency pairs?

A cryptocurrency pair allows you to gain profit from the changing rate of the currency as is the main business for crypto traders.

When considering a trading pair, the order of the currencies in that pair is always relevant.  For example, if you think that ETH will increase in value against the USD, then you should buy the ETH/USD pair, ensuring that ETH is in the first place, with USD second. If you believe that ETH will fall against USD then you should pick a USD/ETH pair.

Some of the most popular exchanges actually avoid using fiat money altogether and only offer pairs in cryptocurrency. The most popular of the crypto-crypto pairs are BTC/LTC or LTC/BTC as well as ETH/BTC and BTC/ETH.

Why do some cryptocurrency exchanges have different prices?

This is because exchanges are completely independent of each other meaning that prices will vary depending on the buy and sell activity of each one.

Each exchange will calculate the price of Bitcoin depending on the volume of its own trades as well as the rate of supply and demand from customers. This means that the bigger the exchange, the more market-relevant the price that you are able to benefit from.

When it comes to BTC, there is no such thing as a stable or fair price for BTC or any other coin- it is always decided by the market at the exact moment. Many news portals and sites such as Google will use the aggregate price of BTC and other cryptocurrencies. Some portals such as Cointelegraph will use its own price index for crypto coins which is calculated as the average price of each coin based on the prices over 27 of the leading exchanges.

Is it possible to profit from price differences across different exchanges?

In a nutshell, yes it is but it would only be a small profit and may not even cover the exchange fees.

If you compare the price of BTC across five exchanges at the same time on any given day, the chances are that you will only see a price difference of around one or two percent. This difference may go up to even 5% on an active trading day that experiences high volumes- usually, the volume goes up a lot each time that the prices dramatically rise or fall.

If you are planning to sell your Bitcoins on one exchange for a higher price and then buy them back on another at a cheaper price just be sure that the fees do not surpass the difference in value. More often than not, it is not worth it.

So where do I start trading?

You will need to get your hands on some cryptocurrencies first.

First up, you will need to start your own account at a cryptocurrency exchange. Then you will need to transfer an initial amount of money into the account but be aware that many exchanges do not accept USD or EUR as a domestic currency.

Instead you will need to buy cryptocurrency and then transfer it to the address that your exchange provides you. You may find a few platforms that accept fiat currency or credit cards but these are not particularly common.

If you don’t have enough money to make the trades that you want to make, you can borrow from the exchange. This is known as margin trading but be sure to know what you are doing and don’t get yourself into a situation that you cannot afford!

 

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