Introduction To Cryptocurrency Exchanges

We have covered lots of things in crypto space like various cryptocurriencies, blockchain technologies, projects and now I'm writing about crypto trading. We've covered basic terminology of financial world that every trader must know. If you missed it then please refer them, if you're beginner :

1) Basic Trading Terms (Part 1)

2) Basic Trading Terms (Part 2)

In this article we'll look into the mechanism of crypto exchanges, both centralised exchanges and decentralised exchanges (DEX). We'll see how orders are placed and filled and a theory of supply and demand.

So let's dive in...!!

Topic of this article is suggested by @RowanSkie

Rise & Need Of Cryptocurrency Exchanges

In 2009, a tremendously famous cryptocurrency Bitcoin founded and that was the beginning of the crypto era. Initially BTC isn't very popular and not it wasn't adopted by people yet. So initially the way of getting Bitcoin is either by mining them or by asking your friends in return of fiats. The popularity of BTC was growing day by day and people started to think about better options to get Bitcoins, this is why the early crypto exchanges come in.

What Is Cryptocurrency Exchange ?

At the very beginning of the human society people were trading things in return of some other things, then fiat currencies got discovered and people trading their products or services in return of fiat currency. And now it's time for crypto, as for goods & services there are markets and for traditional currency exchanges there are stock exchanges, cryptocurrency exchanges are similar in some ways to traditional stock exchanges but has their own features.

Cryptocurrency exchange is an platform that enables their clients (traders) to trade cryptocurriencies or fiat currency for other cryptos, fiat currencies or other digital currencies. Exchanges matches buyers and sellers at their preferred or better prices, let's understand it with an example :

Let's say someone wants to sell BCH for $350 and place a sell order on exchange, then this order gets recorder in 'order book' of an exchange, order book is simply a list of amounts of BCH traders want to sell, and the prices they're looking for. So back to trade, a sell order is considered as an liquidity to the exchange that means now there's more BCH available to buy on exchange. Now if someone place a buy order matching with the same or better price of the seller then that trade gets executed, in this way the trades on both sides gets settled. So in this whole scenario, exchange act an matchmaking service between the buyer and seller.

Who sets the crypto prices ?

The market !! Yes, market itself sets the prices of cryptocurriencies. Many people, mostly from non-technical background thinks that crypto exchanges decides the crypto prices but that's just a misconception. Exchanges acts as an intermediary between buyers and sellers, they've nothing to do with prices.

You may have herd the term & principal of 'Supply and Demand', when supply goes up prices goes down and when demand goes up prices goes up, this is the basic rule of any type of market. This is the same principle dictates the price of crypto. The exchange rate of crypto heavily depends on the actions of buyers and sellers, although other factors can also affect the prices.

Every exchange calculates the price of crypto based on its trading volume as well as the supply and demand of their users. This is why you found slight price difference of same crypto on two different exchanges.

So if you want to get market relevant prices go to bigger exchanges like Binance & Coinbase, as they're the highest trading volume exchanges.

How They Make Money ?

Crypto exchanges have their own revenue generating sources. Here we'll look into some common ways that every centralised crypto makes money.

1) Trading Fees + Commission

Well trading of cryptocurriencies is one of the main purposes why exchanges exists. Crypto exchanges charge some % of fees for every transaction occurs, you've herd the terms 'Makers fee' and 'Takers fee' these are the two types of fees they charge when you enter in and out of the trade. Popular as well as emerging exchanges try to keep those charges as low as possible, the general fees is of 0.1% +0.1% (maker + taker) while some exchanges charge low fees, for example FTX charges 00% + 0.07% (maker + taker) fees. Along with trading fees exchanges also charge withdrawal fees.

2) Listing Fee

Well now this fee isn't charged to traders, who are the end users of the platform, this fees is charged to the project who's coin has to be listed on exchanges for trading.

Many newly created or low exposure crypto exchanges struggles to drive traders so the trading volume, that's why they need another source of revenue. They came up with listing fees, they organise ICOs (initial coin offering), IEOs (initial exchange offering) and other events.

These are the two main revenue generating streams for cryptocurrency exchanges. But these aren't the only, there are other streams like market making, fund collection and other.

Well I think this article is going to longer, so we'll stop here, we'll discuss DEXs in next article. If you aren't get bored and like to read other stuff related to crypto trading, read the following articles :

1) Basic Trading Terms (Part-1)

2) Basic Trading Terms (Part-2)

3) Basic Order Types In Trading (Part-1)

4) Basic Order Types In Trading (Part-2)

Hey, hope you enjoyed and found this article helpful. If you're interested in learning crypto trading, cryptocurriencies, blockchain technologies & projects then subscribe so you'll get notified.

If you want to contact me or discuss some things regarding trading or anything else related, you can find me on twitter : https://twitter.com/ashma1818?s=09

Thanks for your time and appreciation...!!