Here’s How Crypto Exchanges Work – A Beginner’s Guide

When you’re new to the world of cryptocurrency investment and trading, technical concepts may feel foreign and scary. But with a little practice and a few lessons, you can cover the basics. A crucial part of investing in cryptocurrency includes using a crypto exchange.

What’s a Crypto Exchange?

In simple terms, a crypto exchange is an online platform that facilitates the exchange of fiat currency for cryptocurrency. It also allows the exchange of other digital assets and charges a fee for each transaction.

An exchange works by bringing together sellers and buyers of cryptocurrencies together. It offers them a secure environment to buy and sell cryptocurrencies. Of course, it’s important that you do your research on these companies and their reliability. That’s because they can vary greatly in terms of fees and service quality. Trading fees can cost anywhere between 0.1 and 5 percent.

Why’s It Important?

When you want to purchase a new cryptocurrency, you can always do so through a P2P exchange. However, this comes with a fair share of challenges. You may not know where the coins are coming from and there’s a risk of facing liquidity and pricing issues. In contrast, crypto exchanges provide you with better security and ensure faster transactions.

And before you can decide on a suitable crypto exchange to use, It’s imperative that you know how it works. While many of them may differ in terms of the rules they follow and services they offer, the best of them have similar services. These include:

Cryptocurrency Wallets

One of the most basic services that a crypto exchange offers is a way for users to store their precious cryptocurrencies. After all, when you own something that exists on the blockchain and not in tangible reality, how do you store it?

Hardware wallets were among the firstly developed methods to store cryptocurrencies. Although they’re generally regarded as safe, it’s imperative that you remember the private keys to your wallet. If you end up losing or forgetting the keys, you’ll lose access to your funds forever. Therefore, using a crypto exchange that provides crypto storage services sounds like a better option.

Buying and Selling Cryptocurrencies

Obviously, one of the main ways people purchase cryptocurrencies is through an exchange. Investors can compare the prices of crypto assets across different exchanges to find the best deal and purchase it there.

And if you’ve purchased a cryptocurrency at a lower value and want to sell it once the price goes up, a crypto exchange is the best place to do so with an extra fee. Of course, keep in mind that not every exchange buys or sells every cryptocurrency, so choose which ones you purchase very quickly.

Crypto Trading

In trading, the exchange won’t sell cryptocurrencies directly to investors. Rather, it will provide services as the intermediary between sellers and buyers. Then, they charge a fee for each transaction. Simply put, they connect buyers with sellers, allowing the party to trade in their token or purchase a new crypto asset based on their needs.

Crypto Lending

Recently, a large number of crypto exchanges have started providing lending solutions to users. There aren’t many differences when it comes to crypto lending and regular lending. In fact, it’s similar to a bank loan in many ways. The exchange will offer a loan and make a profit from the interest rate charged.

Just like any other asset exchange, cryptocurrencies can be traded in pairs like ETH/USD and BTC/USD. Usually, high-volatility pairs attract greater attention from users.

Bottom Line

Overall, crypto exchanges are an effective means of purchasing cryptocurrencies for investment needs. Crypto exchanges offer services like buying and selling cryptocurrencies, cryptocurrency trading, and even crypto lending. In addition, they also act as a storage solution for people looking to keep their cryptocurrencies. Before you choose a crypto exchange, make sure you look at how much fees it charges and whether it offers trading features for your convenience.