Understanding How Cryptocurrency Exchange Works

Cryptocurrency exchange is a platform that allows traders to buy and sell digital currencies. Learn how it works & what options to consider before committing.

Understanding How Cryptocurrency Exchange Works

Cryptocurrency exchange is a platform that allows traders to buy and sell digital currencies. It works as an intermediary between a seller and a buyer, or, in the language of cryptocurrencies, between a creator and a taker. A cryptocurrency exchange is similar to a brokerage agency, where you can deposit money through bank transfer, credit card, and other common means of payment. Cryptocurrency exchanges reflect the current market prices of the digital currencies they offer.

You can use them to exchange one cryptocurrency for another, such as converting Bitcoin to Litecoin. You can also convert cryptocurrencies back to the U. S. Dollar or other currency on an exchange, to leave it in cash in your account or withdraw it to your regular bank account.

Cryptocurrency exchanges are platforms that facilitate trading cryptocurrencies for other assets, including digital and fiat currencies. In effect, cryptocurrency exchanges act as an intermediary between a buyer and a seller and earn money through commissions and transaction fees. If you want to trade cryptocurrencies, you have to do so through a cryptocurrency exchange because, at least for now, very few traditional investment companies offer cryptocurrencies. Decentralized exchanges such as Etherdelta, IDEX and HADAX do not store user funds on the exchange, but rather facilitate peer-to-peer cryptocurrency trading.

To protect their cryptocurrencies, some exchanges have insurance policies to protect the digital currencies that users have on the exchange against piracy or fraud. This is why there are often slight discrepancies in the price of cryptocurrencies between different exchanges. This is because exchanges that allow you to move your holdings off their platform can't track everything in your personal wallet or the trades you make on other exchanges. Cryptocurrency prices move very fast, so when you use an exchange that doesn't have a lot of trading volume, you could end up paying a higher price than on the most popular exchanges. And some exchanges may follow the KYC (Know Your Customer) protocol, which requires users to share personal and identifying information, similar to traditional exchanges. Since each exchange calculates the price based on its own trading volume, an exchange with more users is likely to offer more market-relevant prices.

Similar to platforms for trading stocks such as Robinhood and Charles Schwab, cryptocurrency exchanges match buyers and sellers. Centralized exchanges offer beginning investors a familiar and friendly way to trade and invest in cryptocurrencies. Whether you've made a decision or are still deciding on it, there are important options to consider before committing to a cryptocurrency exchange.