What are cryptocurrency exchanges and what are their roles?
A cryptocurrency exchange is a digital marketplace that allows traders to trade cryptocurrencies against each other or trade cryptocurrencies for fiat currency. In comparison, cryptocurrency exchanges are like Forex brokers who facilitate the trading of different fiat currencies such as pounds, euros, dollars and Swiss francs among others. In other words, cryptocurrency exchanges are intermediaries that link the cryptocurrency buyers and sellers.
The trading of virtual assets such as stocks, futures and forwards and even trading in forex is often characterized by extremely high volatility. Fr this reason, the different exchanges that facilitate this trading provide different market entry techniques. These techniques include market orders, sell limit orders, buy stops and sell stop orders. The essence of this different approaches is to allow the traders to get involved in the market at the prices they prefer. The cryptocurrency market, on the other hand, is much more volatile than the markets cited above which makes these market entry options even more plausible. Notably, most exchanges provide for market orders and limit orders.
A market order simply means the trader intends to purchase a crypto at the best price available in the market at the moment. A limit order, on the other hand, means that the trader intends to get involved in the market once the market gets to a specific price level. Prices below the current price are referred to as ask while those above are referred to as bid. These terms are interchangeable depending on whether the trader wants to buy or sell the specific cryptocurrency.
Examples of cryptocurrency exchanges
There are a number of cryptocurrency exchanges that one can consider when looking to trade in cryptocurrencies. They include bittrex, poloniex, bitfinex, binance, coinbase and bitstamp among others. Notably, one can also opt to purchase bitcoin through Localbitcoins. One of the differences between local bitcoins and other exchanges is that local bitcoins mostly allows for bitcoin trading. Additionally, local bitcoins are a peer-to-peer bitcoin exchange that allows traders to buy and sell directly to each other. however, one of the common traits among all these exchanges is that each exchange provides the users with wallets that allow them to store their cryptocurrencies safe.
It is important to point out that cryptocurrency transactions on these exchanges attract a certain percentage in fees. Notably, the fee charged per transaction is dependent on the volume transacted. For instance, at Poloniex, bitcoin transactions attract fees ranging between 0-0.25%, Kraken’s fee range between 0-0.36%. The fees charged on cryptocurrency trading are often incurred when one makes a deposit or purchase. Moreover, one should expect conversion fees if they send say USD to an exchange that only allows for EURO based purchases.
In a nutshell, the role of cryptocurrency exchanges is to facilitate the trading of cryptocurrencies against each other or against fiat currency. Notably different exchanges have different portfolios of cryptocurrencies they support. However, bitcoin is available on virtually all available exchanges. While there is a long list of available exchanges, one must be wary of the exchange they settle for. Some of the factors to look for before settling for an exchange include:
- Fees charged
- Geographical restrictions if any.
- Payment methods
- Verification requirements.