What is a cryptocurrency exchange?
Type 'cryptocurrency exchange' into your search engine and a host of companies -- all cleverly named and with a unique business proposition -- quickly appears.
But what exactly is a cryptocurrency exchange, and what services do they offer?
There are many ways to buy and sell cryptocurrencies. Some people trade using peer-to-peer online services. Others prefer to meet in person to exchange coins.
However, more often than not, exchanges are the preferred mode of trade.
Quite simply, cryptocurrency exchanges are online platforms that match buyers with sellers. Given their high volumes of trade, exchanges are widely considered the leading indicators of cryptocurrency value and performance and offer the most competitive rates of trade.
Exchanges come in many shapes and sizes. Some are dedicated to meeting the needs of crypto newcomers. They provide a simple, user-friendly trading experience. Other exchanges are geared to those more familiar with crypto trading. Fee structures, payment methods, coins available for trade and rates of trade (among other things) may also differ from exchange to exchange.
How does an exchange work?
Let's say Mary wants to buy some bitcoin.
1. She deposits her fiat currency -- together with her 'buy' request, to a reputable exchange.
2. The exchange then matches Mary's 'buy' request with a 'sell' request for the same amount. Once a match is found, the exchange completes the trade on behalf of the contracting parties.
3. The exchange collects a small fee or commission for their work to secure the trade.
Whatever happened to decentralisation?
Given that cryptocurrencies were designed to enable parties to transact directly with each other -- independently of banks and other third party involvement, the question of decentralisation is a valid one.
In short, the answer is one of logistics.
Cryptocurrencies do allow parties to transact directly without government and institutional influences, however how exactly would those parties ever connect with each other in order to transact?
Put another way, if Mary wants to buy some bitcoin, how would she go about finding someone willing to sell her some?
Currencies and commodities cannot be traded without a marketplace.
Exchanges are the marketplaces of cryptocurrencies.
The benefits of using an exchange
In addition to connecting cryptocurrency buyers and sellers, exchanges provide a host of other benefits, including:
- Competitive buy and sell rates;
- High volumes of trade (can match 'buy' and 'sell' orders easily, meaning quick transaction turnaround times);
- A variety of payment methods (direct bank transfer, credit card, debit card and PayPal among others);
- Built-in wallet services;
- Security for cryptocurrency transactions (staked on the exchange's reputation).
On the market floor of the cryptocurrency world, exchanges offer a competitive, streamlined means of buying and selling cryptocurrencies.
Keep reading to find out how cryptocurrency exchanges differ from traditional stock exchanges, and tips on what to look for when choosing an exchange.