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23 Feb 2021

How does a cryptocurrency exchange work?

A cryptocurrency exchange allows crypto users the simplicity of trading crypto-to-crypto or crypto-fiat pairings. A relatively new trading asset, cryptocurrency appeals to a lot of investors and traders.

Cryptocurrency trading is an online activity that allows crypto users to convert one crypto to another or convert crypto to fiat and vice-versa. Transactions as local fiat currencies can now convert to a generally accepted currency. You can trade it without going to the bank or traveling miles to make payment for what you need. 

However, not all cryptocurrency exchanges provide the fiat-crypto exchange service. Some platforms that do so include Coinbase.com, Kraken.com, Robinhood.com, and Gemini.com. Also, since most crypto exchange platforms integrate crypto wallets into their platforms, it is becoming easier to move your crypto from one platform to another.

The working principle of crypto exchanges is similar to that of a stock exchange. However, in the stock exchanges, traders profit from the increase in the asset price, whereas crypto traders usually benefit from the cryptocurrencies' volatility. 

Based on their working nature, cryptocurrency exchanges come in two types: centralized and decentralized. They have a different mode of operation and governance.

Centralized Cryptocurrency Exchange (CEX)

A centralized crypto exchange is a cryptocurrency exchange service that works as a third party between the traders. This third party might be a company of crypto experts or individual crypto trading professionals. In a conventional sense, a centralized crypto exchange works like a bank trading fiat currency where a middleman controls all the assets trading on the platform. It has brought a lot of liquidity to the delicate crypto market.

Since the middleman is usually a group of professional crypto-traders, many people think this crypto-exchange method is safer than handling the exchange themselves. Some popular centralized platforms include Binance, Coinbase, Bitfinex, BitMex, Bittrex, Kraken.

Purchasing flow of some platforms on the centralized system

Security of a centralized exchange

The centralized system stores the data of the users and traders on a central database. It makes the centralized system much more open to hackers, scammers, and people with malicious intent than the decentralized network.

Some centralized crypto exchange platforms now boast high-level security for crypto-transactions and data storage with the fast-rising security structures.

Decentralized Cryptocurrency Exchange (DEX)

In the decentralized exchange, the intermediary is not in the picture. It means that the crypto owner trades the crypto by himself. You do not need a KYC procedure; neither would they ask for your personal information. The DEX platform's main advantage is that it is more secure than the centralized platform, and it does not need a mediator. 

Some popular DEX platforms include Binance Dex, AirSwap, OmegaOne, WavesDex, Bancor Protocol, Kyber Network, EtherDelta, Bisq, 0x, BarterDex, Nxt, and Counterparty Dex.

The difference between a centralized and a decentralized cryptocurrency exchange

Process of crypto trading

- Choose a crypto trading platform.

The first step in becoming successful at trading cryptocurrency is to choose a platform that has what you want. For example, if you would like to trade in your local currency, you would want to choose a platform that allows you to do so. You would also want to choose a platform that provides enough security for your money and crypto, as you will not like a situation where you lose your money to hackers and scammers. Apart from security, other factors that you should consider while choosing a platform include – the platform’s exchange rate, 

- Create a user account.

This would require your full name, an accessible email address, and a password.

- Pass the KYC or AML procedure.

The KYC (Know-Your-Customer) and the AML (anti-money-laundering) procedure require a user-verification procedure for crypto exchange platforms before a user can start to trade crypto on the forum. The level of verification requirement varies from platform to platform. While some platforms would only require email confirmation, some require an additional identification method such as a picture of the user's passport (or driver's license/the national ID card), phone number verification, and other personal information. 

- Connect your payment methods – such as a bank account, credit card, or debit card.

To start trading cryptocurrencies, you need to fund your account wallet with the money that you would like to use to buy the cryptocurrency.

- Decide on which cryptocurrencies you want to buy and sell.

There are thousands of cryptocurrencies you can trade, and we do not think it wise to decide to trade in all of them. It is better to choose the ones you follow, know about, and plan to profit by selling. 

- Buy cryptocurrency.

The next thing to do is to buy cryptocurrency on the platform.

- Get a trading strategy.

Many factors affect the volatility of cryptocurrencies. Since the purpose of trading crypto is to make a profit, and a wrong decision can cost you a lot of money, you would need to research and adopt a trading strategy aimed for the win. Try analytical platforms like Yellow Blockchain to read on and study the different tokens on the market.

Crypto trading pairs

The crypto trading pair is two different currencies that you can trade on a platform. The trading pair can be two cryptos as a pair for those who want to switch from one cryptocurrency to another. It may contain a cryptocurrency and a local fiat currency.

Those who wish to trade from a cryptocurrency to their local fiat currency or vice versa can opt for a crypto trading pair. However, it is essential to note that not all crypto exchange platforms provide the fiat-crypto pairing option. Also, the crypto-crypto pair transaction fees are often lower than those of a crypto-fiat pair transaction.

For the most part, it will depend on how flexible the crypto exchange platform software is.

Some famous crypto-fiat pairs include BTC/USD, LTC/EUR, and ETH/GBP.

Conclusion

In conclusion, to trade crypto, you need to:

- Register on your preferred cryptocurrency exchange platform;

- Deposit some fiat money;

- Buy some cryptocurrency with it;

- Send the crypto back to the safety of your wallet;

- and then Sell that cryptocurrency at a profit.

You can use crypto wallets to receive, send, and store crypto. In choosing a crypto exchange platform, the factors you should consider are security, transaction fees, and ease of use.

However, one of the essential things you need to run a successful crypto trading is understanding how the crypto market works.

Good luck with starting your crypto trading career! Make sure to leave comments about your experiences to help future traders.

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