Cryptocurrency exchange platforms are essential for trading and investing in digital assets like Bitcoin and Ethereum. These exchanges allow users to exchange cryptocurrencies for other digital currencies or traditional assets.
To effectively trade cryptocurrencies, it is crucial to understand the different types of orders that can be placed on these markets, including market orders and limit orders. In this article, we will explore how crypto exchanges work, including centralised and decentralised exchanges, and the 2-4 different types of orders that traders can use, including smart contracts.
How Crypto Exchange Works?
The need for cryptocurrency exchanges has grown substantially as more individuals recognize cryptocurrencies as valid methods of payment and investment. In fact, new exchanges are popping all over the web. It’s also one of the reasons why most people are now starting to ask how crypto exchanges work.
These types of exchanges function as an intermediary between buyers and sellers. They provide a platform where these parties can trade cryptocurrencies for other digital assets or fiat money.
The order book, which displays live buy and sell orders, is one of the essential aspects of the platform. The orders that are currently on the book have a direct influence on the market price of a cryptocurrency.
Because of this, the trading volume will increase according to the number of active traders presents on an exchange.
Different exchanges may have slight discrepancies in the price of cryptocurrencies, primarily because each exchange calculates the price based on its own trading volume.
Types Of Orders
When placing orders on a crypto exchange, two types are commonly used – “Limit Order” and “Market Order”.
A limit order is an instruction to the exchange to trade funds at a predefined price or better. The order will be carried out if either a buyer or a seller is prepared to transact at that price.
On the other hand, placing a market order gives the exchange the instruction to trade money at the most advantageous market price that is currently listed in the market order call book. For most people, the market order is more commonly used than the limit order.
A Quick Example
To explain how limit and market orders work, let’s use the BTC/USDT pair on these different exchanges as an example.
Suppose we want to buy 0.10 BTC and place a limit order on Exchange A to purchase it at 38,750.00 USDT. This means that the order will only be executed if a seller is willing to trade at that price.
On Exchange B, the order book is different, and the price for 0.10 BTC is slightly higher at 38,800.00 USDT.
If we were to place a market order on Exchange C, we would end up with 0.10 BTC at an average price of 38,812.50 USDT per BTC, assuming the order book’s liquidity remains constant.
However, placing a large block trade on exchanges can be challenging, as price fluctuations may move against you, resulting in a poor entry/exit point.
Therefore, high-net-worth investors and family offices prefer to use dedicated wealth management firms. These firms offer personal relationship managers, OTC trading services, deep liquidity, tight spreads across pairs, and a comprehensive white glove service.
Emergence Of DEX
In recent years, decentralised exchanges (DEX) have emerged as an alternative to centralised exchanges. Decentralised exchanges function without intermediaries, which means no central authority controls the platform like centralised exchanges. It’s also what makes it difference from decentralised exchanges.
Instead, trades are executed using smart contracts, and users retain control of their funds. DEXs offer greater security and privacy to traders, as they do not require users to disclose personal information, such as their name or address.
Crypto exchanges are the backbone of the crypto ecosystem, providing a platform where traders can buy and sell virtual assets. These crypto exchanges work by using an order book to display live the orders, directly impacting the exchange rate of cryptocurrencies.
Understanding how these crypto exchanges work and the types of orders used on these platforms is crucial for cryptocurrency investors who wish to participate in the crypto trade.
2 Types Of Cryptocurrency Exchange – Decentralised Vs. Centralised
Investors can trade crypto assets on centralised or decentralised exchanges (CEX) exchanges.
CEXs are popular due to their user-friendly interfaces and extensive trading options such as staking, loans, futures, and airdrops.
DEXs, based on the smart contract of contracts and peer-to-peer marketplaces, allows users to trade without intermediaries, maintaining custody of their assets.
CEXs require identification verification steps, unlike DEXs, which don’t need KYC. However, digital asset exchanges are prone to risks associated with counterparties, making it difficult for new traders to navigate their interfaces.
The trader’s interests and preferences should guide their choice of a DEX or CEX platform. DEXs appeal to investors concerned with privacy, willing to take risks, and access a broader range of small-cap projects. CEXs may appeal more to novice traders looking for user-friendly interfaces with support.
How Do Exchanges Make Money?
Centralised exchanges generate revenue from various sources, with transaction fees being the most common approach. These fees may be a percentage of the trade or a flat cost.
In addition, some exchanges charge fees for deposits, withdrawals, and even the listing of new crypto assets. Margin trading, which allows traders to leverage their positions, is another source of income for exchanges.
They charge traders a fee in exchange for providing them with leverage.
Additionally, exchanges may offer premium membership fees to access premium services such as faster transaction processing, exclusive access to new currencies, and trading signals.
These premium services may be bundled with other premium features. By allowing users to issue native exchange tokens, exchanges create a native ecosystem where users can use tokens to pay transaction fees and get discounts.
Finally, exchanges may earn interest on cash placed with them, which can be used to provide loans to traders operating on margin.
How Is Cryptocurrency Converted Into Real Money In Cryptocurrency Exchanges?
These exchanges offer multiple ways for customers to convert cryptocurrencies into fiat money. The most common way is to link their bank accounts or credit cards to the crypto exchange or platform.
In addition, some exchanges provide a peer-to-peer trading feature that enables users to trade directly with one another. Payment processors partnerships with exchanges allow users to pay through multiple payment options like Apple Pay or PayPal.
Such exchanges may also provide cryptocurrency-backed loans, enabling users to borrow fiat cash against their crypto assets.
Furthermore, facilitating initial exchange offerings of new crypto assets on how cryptocurrency exchange works their platform is another approach to making money.
Crypto Exchanges – What Happens If It Shuts Down?
In the event of a crypto exchange closure, customers may have difficulty accessing their assets stored there. If the exchange has adequate security measures in place, the customer’s assets should be stored in cold storage wallets that are less susceptible to being hacked.
However, if the exchange is subject to a cyberattack or security breach, users’ assets may be stolen. Users may be required to take legal action to recover their funds.
It is recommended that users store their crypto assets in a personal wallet rather than leaving them on an exchange to reduce the likelihood of losing their funds if the exchange shuts down.
The use of blockchain technology ensures transparency and security in the crypto industry, and the increased competition among new exchanges has improved services and user experiences.
Additional Resources:
* How To Buy Cryptocurrency For Beginner?
* How Do You Get Cryptocurrency For Beginners
* CoinMarketCap – How Do Cryptocurrency Exchanges Work?
* Investopedia – Cryptocurrency Exchange
