What are they and how do they function?
If you are an enthusiast of cryptocurrency and digital assets, you are sure to be a regular user of cryptocurrency exchanges.
What are Cryptocurrency Exchanges?
Cryptocurrency exchanges are internet market platforms that facilitate the trading of cryptocurrencies or digital currencies. It allows for the buying and selling of currencies, whether digital or fiat. For some, they are limited to crypto to crypto, while others allow for the exchange of fiat to crypto, or crypto to fiat. Cryptocurrency exchanges, in general, are independent of the creators of digital tokens. They are entities that only facilitate and administer the coming in and going out of different cryptocurrencies and trading thereof. Profits are earned from commissions from transactions or straight up charge fees.
For newbies, if you do decide to participate by investing your fiat currency, say US dollars, into cryptocurrencies, you need to set up an online account, called a wallet. By doing so, you can now be able to use it to receive coins or even send coins to other wallets. But if your crypto wallet is only limited to Bitcoin or Ethereum and is not capable of buying and selling other cryptocurrencies, you would need to go to a cryptocurrency exchange and set up your account, put in coins, and start trading. But cashing in your altcoins for profit may not be that easy as there are no wallets yet that function both as a storage and a fiat gateway. You will need to trade altcoins back to Bitcoin or Ethereum. Then from your exchange account, you may send them back to your wallet wherein you can now be able to cash them out.
Learning the trade
Certain legalities vary from country to country when it comes to trading across borders. The United States of America, for example, categorize cryptocurrencies as property and, therefore, are subject to capital gains taxes. Other countries consider the buying and selling of cryptocurrencies as illegal and have issued blanket bans. One must study first the regulations governing cryptocurrencies among nations before embarking on knowledgeable crypto trading.
CEX and DEX
Cryptocurrency exchanges (CEX) mostly are centralized intermediaries that require the custody of your digital assets before making trades on their platforms. The custody of your digital assets will accrue interests to your favour. Decentralized exchanges, on the other hand, give you full custody of your digital assets. DEXs do not keep or store user funds that make them resistant to problems of security, unlike CEXs. Instead, they facilitate peer-to-peer transactions through smart contracts and atomic swaps. Some centralized crypto exchanges are adopting features that these decentralized exchanges are offering, which can be factors that are making DEXs experience low trading volumes. Trading volumes affect the volatility of the currency in that exchange. High trading volumes can mean that crypto price fluctuations are unlikely to occur.
Due to the relative newness that cryptocurrency features offer as alternatives to fiat or hard cash money, most people will still rely on centralized exchanges, being the obvious experts in the field, as custodians.
Until such time that people become confidently empowered to take control of their assets, learning as they go, centralized and hybrid solutions will continue to be the norm.