Crypto Alphabet

What are cryptocurrency exchanges?

Cryptocurrency exchanges allow exchanging one cryptocurrency for another, the buying and selling of coins, and the exchange of fiat money into crypto.

Crypto exchanges set the rate of the currencies — both coins and tokens. The cryptocurrency rate usually depends on the actions of sellers and buyers, although there are other factors that can affect the price.

Different crypto exchanges may have different options and functions. Some of them are made for traders, while others are made for prompt crypto-fiat exchange. Crypto exchanges — that are designed for regular traders — allow you to buy crypto and sell them with lower commission fees than on crypto-to-fiat exchanges. Also, trading platforms charge fees for withdrawing money from the account.

Cryptocurrency exchanges work similarly to regular stock exchanges. The difference is that, on a stock exchange, traders buy and sell assets — shares or derivatives — in order to profit from their changing rates, while on crypto exchanges, traders use cryptocurrency pairs to profit from the highly volatile currency rates.

Some popular exchanges avoid using fiat money altogether by offer pairs only in crypto. The most popular crypto-to-crypto pairs are BTC/LTC or LTC/BTC, and ETH/BTC or BTC/ETH. However, there are plenty of crypto exchanges, that allow trades with USD (USD/BTC, BTC/USD, and so on). After earning a profit — or maybe a loss — you close the deal and start another one.

Crypto exchanges have different prices because exchanges are not connected. Prices vary depending on the buy and sell activity on each one of these exchanges.

Every exchange calculates the price of Bitcoin based on its own volume of trades, as well as supply and demand of its users. This means that the bigger the exchange, the more market-relevant price you get.

There is no such thing as a ‘stable’ or ‘fair’ price for Bitcoin or any other coin — it’s always determined by the market at each particular moment.

If you compare the price of Bitcoin from five popular exchanges during a regular trade day, you will most probably see a one or two percent difference. The difference may reach up to five percent on active trading days with higher volumes — typically the volume goes up every time the prices rise or fall dramatically.

If you’re going to sell your Bitcoins on one exchange for higher price and buy them at another for cheaper value, make sure that the transaction fees and the fees implemented by the different exchanges don’t surpass the value difference. Sometimes it isn’t worth it.

To start trading you need to buy some cryptocurrency first.

To start your own account on any crypto exchange, you need to transfer an initial amount of money into the account. It’s very common that crypto exchanges don’t accept USD or other fiat money as the domestic currency —  i.e., the currency you put into the account in the first place.

So, you should buy some crypto on the cryptocurrency exchange — or in your crypto wallet app — and transfer them to the address that the crypto exchange provides you. Although, you may also find some platforms that accept USD — as well as PayPal and credit cards.

If you don’t have enough money to trade, you may borrow it from the crypto exchange. This is called margin trading. In this case, it’s important to remember that there may be a leverage factor, which could either increase your profits or your losses.