Exchange is an organizer of trading in commodities, currency, securities, derivatives and other market instruments.
The obsolete meaning of the word exchange is «a place or building where traders, intermediaries, stockbrokers gather at certain hours to conclude transactions with securities or commodities».
Before the era of computerization, the parties agreed on transactions verbally. Now the auctions are mostly held in electronic form via specialized programs.
Exchange keeps records of executed transactions, implements, organizes and guarantees settlements.
Usually exchanges receive fees from each transaction concluded with their help. This is the main source of their income. Other sources may be membership fees, fees for access to trading, sale of exchange information, etc.
Cryptocurrency exchanges accept deposits in cryptocurrencies and fiat and allow the client to do the following:
- Get funds back on demand.
- Make and receive payments in cryptocurrencies.
- Sell and buy cryptocurrencies for fiat or some other cryptocurrencies.
The main source of income for cryptocurrency exchanges is constituted by «fees» received for each transaction and «withdrawal of funds». Transaction fees are extremely low so that a lot of transactions would be executed. Withdrawal of funds from crypto exchanges will cost more — 2-3 %.
The principle of the cryptocurrency exchange
Crypto exchanges connect the seller of cryptocurrencies with the buyer and allow the user to exchange their cryptocurrency for many other altcoins. In some cases, this is the only way to get an unpopular altcoin.
For example, you have bitcoin — you want to exchange it for X-coin, you enter your bitcoin to the exchange address, find a bitcoin/X-coin pair and exchange it. Now you can withdraw X-coin from the exchange to a wallet that supports the X-coin storage function, or store it on the exchange in order to quickly exchange it for bitcoin or another possible cryptocurrency if necessary.
If you don’t have bitcoin and you need X-coin, then the algorithm will be as follows: since you can buy a lot of altcoins with the help of major cryptocurrencies, such as bitcoin or ether, then first you need to purchase them. If the exchange supports the fiat input function, then you enter fiat into the exchange, change it to a stablecoin, for example, USDT, and then to bitcoin. Next, you change bitcoin to X-coin. If there is an X-coin/USDT pair on the exchange, then an intermediate exchange for bitcoin is not needed.
How the crypto exchange works
Crypto exchange as an information product that consists of computer hardware and software.
The software shell registers the user and creates an account in which he replenishes his digital and fiat accounts or withdraws money, places buy and sell orders. Many exchanges provide additional functions — chat, news feed, exchange rate analytics, and the like.
The «hardware part» is represented by servers on which operations are performed and data about users, their accounts, and transactions carried out by them are stored.
Registration on exchanges is free and for an experienced user does not present difficulties, which cannot be said about beginners: most exchanges have a complex interface that is loaded with functionality for traders.
To register, you need to enter an arbitrary name, come up with a password and a new e-mail address for the security of your account on the exchange.
On some exchanges, users are divided into several levels of available capabilities, and verification is required to increase the level and expand the functionality, including sending passport data and document scans. Anonymity is lost at the same time, but the user has access to more trading operations, ways of entering and withdrawing money and opportunities to restore access to the account in case of password loss.
After creating an account, the exchange will indicate the address to which the funds should be transferred to start trading them or use them to exchange for the currency you need. But keep in mind: although the wallet address is declared as yours, it is generated by the exchange server, and the private keys from it are stored by her. So theoretically, the owners of the exchange can dispose of all the cryptocurrencies listed there at their discretion.
If the exchange goes bankrupt, is robbed by hackers or is closed by law enforcement agencies, the chances of users getting their funds are minimal. In such cases, everything depends on the decency of the owners and the scale of the problems.
It is not worth storing cryptocurrency on the stock exchange — keep only what you intend to trade on your accounts. The rest is better to withdraw to your address — it is desirable to transfer large amounts to «cold storage».