Crypto Exchanges, Explained
How do crypto exchanges work?
They allow exchanging one cryptocurrency for another, the buying and selling of coins, and the exchange of fiat money into crypto.
Crypto exchanges set the rate of the currencies — both coins and tokens. The cryptocurrency rate usually depends on the actions of sellers and buyers, although there are other factors that can affect the price.
Various crypto exchanges may have different options and functions. Some of them are made for traders, while others are made for prompt crypto-fiat exchange. Crypto exchanges — that are designed for regular traders — allow you to buy crypto and sell them with lower commission fees than on crypto-to-fiat exchanges. Also, trading platforms charge fees for withdrawing money from the account.
Basically, crypto exchanges work similarly to regular stock exchanges. The difference is that, on a stock exchange, traders buy and sell assets — shares or derivatives — in order to profit from their changing rates, while on crypto exchanges, traders use cryptocurrency pairs to profit from the highly volatile currency rates.
What are cryptocurrency pairs?
Trading pairs of cryptocurrencies allows you to profit from the currencies changing rates — it is the primary business for crypto traders.
Keep in mind that the order of currencies in the pair always matters. For example, if you anticipate that BTC may increase against USD in the near future, you should buy the BTC/USD pair — with BTC first place and USD second — and vice versa, if you think that BTC may fall against USD, in which case you purchase should the USD/BTC pair — with USD coming first.
Some popular exchanges avoid using fiat money altogether by offer pairs only in crypto. The most popular crypto-to-crypto pairs are BTC/LTC or LTC/BTC, and ETH/BTC or BTC/ETH. However, there are plenty of crypto exchanges — such as the ABCC platform — that allow trades with USD (USD/BTC, BTC/USD, and so on). After earning a profit — or maybe a loss — you close the deal and start another one.
Why do crypto exchanges have different prices?
Because exchanges are not connected. Prices vary depending on the buy and sell activity on each one of these exchanges.
Every exchange calculates the price of Bitcoin based on its own volume of trades, as well as supply and demand of its users. This means that the bigger the exchange, the more market-relevant price you get.
There is no such thing as a ‘stable’ or ‘fair’ price for Bitcoin or any other coin — it’s always determined by the market at each particular moment.
A lot of news services — Google being one of them — use an aggregate price of Bitcoin and other coins. Cointelegraph uses its own price index for BTC, ETH and other currencies, which is calculated as an average value based on the prices of 27 popular exchanges.
Can I profit from price differences at various exchanges?
A small profit is possible if the price difference covers exchanges fees.
If you compare the price of Bitcoin from five popular exchanges during a regular trade day, you will most probably see a one or two percent difference. The difference may reach up to five percent on active trading days with higher volumes — typically the volume goes up every time the prices rise or fall dramatically.
If you're going to sell your Bitcoins on one exchange for higher price and buy them at another for cheaper value, make sure that the transaction fees and the fees implemented by the different exchanges don’t surpass the value difference. Sometimes it isn’t worth it.
However, there is plenty of software on the internet called trading arbitrage, which allows you to make small profits from the differing Bitcoin prices — depending on how much time you have to research.
I want to trade, where do I start?
You need to buy some cryptocurrency first.
To start your own account on any crypto exchange, you need to transfer an initial amount of money into the account. It’s very common that crypto exchanges don’t accept USD or other fiat money as the domestic currency — i.e., the currency you put into the account in the first place.
So, you should buy some crypto on the cryptocurrency exchange — or in your crypto wallet app — and transfer them to the address that the crypto exchange provides you. Although, you may also find some platforms that accept USD — as well as PayPal and credit cards.
If you don’t have enough money to trade, you may borrow it from the crypto exchange. This is called margin trading. In this case, it's important to remember that there may be a leverage factor, which could either increase your profits or your losses.
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