What is a cryptocurrency exchange?
A cryptocurrency exchange is an organization that facilitates cryptocurrency transactions. Cryptocurrency exchange customers can buy and sell a variety of digital currencies. They may be able to do the following through the exchange platform (not a complete list):
Exchange one type of cryptocurrency for another at the conventional exchange rate.
Exchange cryptocurrencies for fiat currencies (US dollars) or cryptocurrencies linked to fiat currencies.
Spend cryptocurrency, for example, using a linked debit card.
Access educational resources to learn about digital currency.
Find exchanges with the best platforms for cryptocurrency trading if you plan to trade digital assets on the go.
Is cryptocurrency safe?
There are two components to cryptocurrency security – security and investment volatility.
First, let’s look at the security of your cryptocurrency investment. The cryptocurrency you keep in your account on the exchange is usually very secure. This is unless you use a reputable exchange (as mentioned here). Indeed, one of the selling points of Bitcoin’s blockchain is its security.
Most leading cryptocurrency exchanges hold the lion’s share of their digital assets in “cold storage.” This means they are stored offline and are not at risk of being hacked or stolen. Before cryptocurrency, exchanges were at risk of being hacked, but these issues were largely addressed.
Alternatively, as discussed above, you can choose to keep your cryptocurrencies in a specific digital wallet of your own. You can even use one to make your offline storage. However, the security and efficiency of the major exchanges should be sufficient for most investors. Remember that you also need to take steps to secure your account – even the best website for cryptocurrency will not be protected if you do not enable two-factor authentication and set up strong passwords.
Now let’s consider security from an investment perspective. It is important to note that cryptocurrency – even Bitcoin, the largest and most established – is a young asset class and rather volatile. This is especially true for small cryptocurrencies on the market. So, you have to be prepared to endure big price changes over time. And, like other investments, don’t invest money that you can’t afford to lose.
How does bitcoin exchange work?
Bitcoin is designed to enable peer-to-peer price exchanges like cash, but not digitally. This means you can trade Bitcoin for anything, and you can do so without using intermediaries like banks or payment apps. For example, if someone does all kinds of work in your home, you could potentially negotiate to send that person an agreed amount of bitcoin as payment. It will be no different from transferring cash in exchange for house-painting services.
Of course, since most people do not use Bitcoin as a medium of exchange in their daily lives, it is usually harder to find peer-to-peer sellers/buyers than businesses. In local currency.
What is liquidity?
Liquidity means that you can easily trade in and out of an asset – and it depends on the number of buyers and sellers (market participants) for an asset. Cash is generally considered the most liquid asset, as it is almost universally accepted. In other words, it’s easy to exchange cash for what you want. In contrast, a car is usually a less liquid resource than cash because it requires some effort to find a buyer. Meanwhile, a high-asset collector’s car would be an even less liquid asset since the pool of potential buyers is small.
Bitcoin is the most liquid of all cryptocurrencies because it combines the maximum number of exchanges with many market participants. Bitcoin daily exchange is measured in billions of dollars! Yet, it is not liquid compared to cash, especially when it is used to buy something in the real world. For this reason, a bitcoin exchange is needed.
What is a bitcoin exchange?
Bitcoin Exchange is any service that matches Bitcoin buyers and sellers. It is these exchanges that make Bitcoin a liquid asset for large-scale traders.
When most people talk about bitcoin exchanges, they refer to centralized ‘custodial’ platforms like BPX Singapore and Byte Power X Australia. These platforms facilitate the trading of Bitcoin and many other cryptocurrencies. Like platforms for trading stocks like Robin hood and Charles Schwab, cryptocurrency exchanges match buyers and sellers.
Critically, by definition, a centralized crypto exchange takes custody of your bitcoin. It has many implications for security and the freedom to use Bitcoin as you wish.
How does a centralized bitcoin exchange work?
From the user’s point of view, the general flow is as follows:
Sign up in exchange and submit the identity document.
If exchange allows, Bitcoin is another cryptocurrency, or, if exchange allows, fund your newly created account with local currency.
Make a trade by setting a ‘purchase order.’
Buy-sell orders are compiled into an ‘order book,’ which the exchange maintains to efficiently and automatically match buyers and sellers. Most cryptocurrency exchanges allow you to set both ‘market buy’ orders and ‘limit buy orders, but we don’t have any limit. When creating a market buy order, you only need to indicate how much bitcoin you want to buy (you do not set the price). The exchange will automatically match you with the seller (s) currently offering the lowest price and will perform your trade. Market orders are completed widely and instantly, which means that at the time you submit an order, you will receive your Bitcoin in your Exchange Wallet / Account. When you create a limited purchase order, it indicates how much bitcoin you want to buy and how much you are willing to pay. If and when sellers are willing to accept your set price (your ‘limit’), your order will be completed, meaning your Bitcoin will appear in your exchange wallet. Your money (or another cryptocurrency) will disappear.