Cryptocurrency exchanges are extremely relevant to the entire community investing in tokens and digital currencies. They enable convenient trading of virtual assets and contribute to the gradual development of this market. The following article is a complete guide to cryptocurrency exchanges, which explains step by step what they are, how they work, and what types of exchanges there are. We also discussed issues related to the security of cryptoexchanges and their use, as well as other solutions that enable cryptocurrency trading.
What is a cryptocurrency exchange?
A cryptocurrency exchange is a trading platform that allows users to buy, sell, and also store bitcoin, ethereum, and other digital assets. It is a kind of virtual intermediary in trading, which can be compared to traditional stock exchanges and brokerage houses at the same time.
Crypto exchanges, like brokerage houses, offer access to the most important information about individual instruments. Their platforms show current prices, trading volumes or the best buy and sell offers. They also provide technical analysis tools and indicators that make it easier to analyze cryptocurrency rates and make investment decisions.
Cryptocurrency exchanges have even more in common with classic stock exchanges, e.g. stock exchanges. Examples? Trading is carried out on their own systems, they are directly responsible for the execution of placed orders, and they also decide which instruments to include in their exchange trading.
Differences between a cryptocurrency exchange and a traditional stock exchange
Beginner crypto investors usually already have some knowledge of traditional exchanges and the instruments listed on them. Therefore, it is worth starting the discussion of how cryptocurrency exchanges work by comparing them with traditional exchanges.
When it comes to other features of exchanges, such as trading liquidity, entry costs or investment risk, there are no top-down differences. These issues depend primarily on the specific instrument, not on what type of exchange you are dealing with.
Features of cryptocurrency exchanges
Now let’s move on to the cryptocurrency exchanges themselves and analyze their functionality in more detail.
Currently, there are already hundreds of cryptoexchanges on the market, and the scope of basic functions is the same for each of them. First of all, they allow you to exchange fiat currencies for crypto and trade between different cryptocurrencies (you can exchange, for example, bitcoins directly for ethereum, dollar stablecoin or other cryptos). In addition, exchanges provide wallets for storing cryptoassets, as well as price charts along with a more or less extensive package of analytical tools.
Some exchanges also offer the possibility of investing in leveraged instruments. These include primarily crypto contracts, although individual exchanges also offer cryptocurrency options. Thanks to them, traders can bet on the decline or growth of popular cryptocurrencies, while gaining chances for high profits (or losses) with a small capital commitment.
Here are the other features and opportunities that cryptoexchanges can offer
Educational forms aimed at spreading knowledge about cryptocurrencies, blockchain technology and investing, own tokens that allow you to use reduced commissions on a given exchange; there are also exchanges that issue their own so-called stablecoins, i.e. cryptocurrencies with a fixed exchange rate, depending on the value of a specific fiat currency, e.g. the US dollar,
launchpad platforms that allow you to invest in new projects at an early stage of development; thanks to this, investors have a chance to participate in token issues (ICO or IEO) and earn on the potential increase in their value,
an API that allows you to automate transactions and integrate with algorithmic trading applications,
Cryptocurrency payment processing, a service for entrepreneurs that allows them to accept payments in Bitcoin or Ethereum, for example. What opportunities are available on a particular cryptocurrency exchange depends on the details of its offer. Some of them offer all of these features, while others limit their activities to a few basic ones.
Risks of using cryptocurrency exchanges
As an investor, you should be aware of the risks that can affect the safety of your assets and the outcome of your investment. So take a look at the most important risks associated with the use of cryptocurrency exchanges.
- Hacking attacks
Despite implementing advanced security systems, even the largest platforms are not fully immune to cyber threats. The collapse of the Mt. Gox exchange or the hacks on Binance and Upbit prove that it is possible to steal huge amounts. The fact is, however, that such cases are now less frequent, and if they do happen – there is a chance that the exchange will return the stolen funds.
Investors are also exposed to phishing (impersonating a platform for the purpose of phishing) and other scams, using, for example, fake applications and stock exchange websites. These types of activities seem to be more popular than direct attacks on cryptocurrency exchanges these days.
- Loss of funds
Using lesser-known or unproven exchanges carries the risk that the platform may go out of business abruptly. In the past, there have been cases where exchanges have disappeared from the market, taking users’ funds with them.
In addition, some exchanges may delay withdrawals, which can be the result of the platform’s financial problems or the deliberate actions of their dishonest operators.
H2: Fluctuations in cryptocurrency rates
We should not forget about the risks associated with investing in cryptocurrencies or related financial instruments. These are highly volatile assets that can bring spectacular profits, but also severe losses. The latter can prove to be particularly painful when you use contracts based on high leverage.
Other risks
There are other types of risk associated with the use of cryptoexchanges:
potential regulatory problems – the emergence of new regulations may result, for example, in limiting the activity of the exchange or problems with customer access to funds,
loss of access to the account – due to, for example, forgetting login details or failure of the authentication device,
User error – sending cryptocurrencies to the wrong address causes their irreversible loss.
If you want to speculate on short-term changes in cryptocurrency prices, consider using traditional brokers such as XTB or TMS Brokers. Such entities offer CFDs that allow you to play with leverage on the drops and increases in the prices of selected coins. With them, you can continue to earn and lose on price changes of your chosen cryptos, while avoiding the aforementioned risks associated with using a cryptoexchange.
