We must state: cryptocurrencies have firmly entered our lives. In 2024, we have already seen from the example of NotCoin and Hamster Kombat that digital assets are of interest not only to crypto enthusiasts, but also to people who have never had anything to do with investments before. But just like stocks and currency pairs, cryptocurrencies are traded on exchanges, where multi-billion dollar transactions are made every day.

In this article, we will understand the principles of operation of these platforms, talk about the main types of exchanges and factors that need to be taken into account when choosing the right one for you.

What is a cryptocurrency exchange?

The essence of the operation of a cryptocurrency exchange is similar to the functioning of traditional stock exchanges, where shares and bonds are traded. Here, the role of securities is played by digital currencies – Bitcoin, Ethereum and others.

The exchange acts as an intermediary, providing a platform for interaction between buyers and sellers of cryptocurrency. It sets the exchange rate for each trading pair (cryptocurrency-cryptocurrency, such as BTC/ETH, or fiat-cryptocurrency, such as USD/BTC), at which transactions are made.

Exchange users have access to tools that allow them to place orders to buy or sell cryptocurrency. These orders are recorded in a special order book, where the exchange compares them with each other, trying to find offers that match the price and volume. The exchange charges a commission for its work organizing transactions.

How do cryptocurrency exchanges work?

Unlike traditional markets, which are limited by the time frames of exchanges, cryptocurrency markets operate 24 hours a day, 7 days a week. This means that traders have uninterrupted access to trading cryptocurrency assets without being tied to time zones or weekends.

The secret to this accessibility lies in the decentralized nature of the cryptocurrency system. Unlike stocks or commodities traded on centralized exchanges, the cryptocurrency market doesn’t have a single control center. It is distributed over a network of computers around the world, which ensures uninterrupted operation without being tied to time zones and operating modes of traditional financial institutions.

However, it is important to note that even when operating 24/7, cryptocurrency exchanges may temporarily suspend their operations to conduct scheduled maintenance or introduce new features. Users are notified of such periods of downtime in advance to minimize any inconvenience.

By opening an account on a cryptocurrency exchange, you have access to a wide range of digital assets. You are given the opportunity to trade both popular cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Polkadot (DOT), Dogecoin (DOGE), as well as lesser-known altcoins.

Depending on the exchange you choose, you may be able to purchase cryptocurrency with fiat money (e.g. US dollars, euros) or exchange one cryptocurrency for another.

The larger and more reputable the cryptocurrency exchange, the wider the selection of cryptocurrencies available for trading will be presented. However, before registering with an exchange, it is always recommended to review the list of supported assets to ensure that the cryptocurrency you are interested in is represented on that platform.

How to trade on a cryptocurrency exchange?

1. Top up your account. To start trading cryptocurrency, you need to fund your account on the exchange, which is often called a cryptocurrency wallet. It is important to note that such a wallet, provided by an exchange or application, is usually stored on the servers of that platform. For greater security, it is recommended to create your own crypto wallet, which will be under your full control.

2. Studying prices. After funding your account, you can view trading prices for various cryptocurrencies. Just like in other markets, prices on the stock exchange aren’t set artificially, but are formed under the influence of supply and demand.

Most exchanges display live market prices, however, due to the decentralized nature of cryptocurrencies, there may be slight price differences between different platforms.

3. Placing an order. Having decided on the asset you are interested in, you can place an order to buy or sell it. Your order will be added to the exchange’s order book, where it will await execution. The order book also displays other users’ orders to buy and sell the cryptocurrency you select.

Before placing an order, be sure to familiarize yourself with the order types available on the exchange. Understanding how orders work (market, limit, stop orders) will allow you to implement your trading strategies more effectively.

Crypto exchange commissions

Cryptocurrency exchanges charge commissions for trading transactions. Typically they fall into two categories:

Maker’s commission. Paid by traders who act as liquidity providers in the market by placing limit orders. Such orders are placed at a certain price and aren’t executed instantly, but make the market more liquid.

Taker commission. Charged to those who make trades using existing orders in the order book. These orders, called market orders, are executed immediately at the current market price.

It is important to consider the fee structure. Different cryptocurrency exchanges may have different fee schemes. Some exchanges offer degressive commissions, where rates decrease as trading volume increases.

In addition to maker and taker fees, exchanges may charge additional fees for services such as withdrawals, margin trading, and API use. Thorough research into different cryptocurrency exchanges is essential.

Users should compare fees, functionality, security measures and other factors to select the exchange that best suits their needs, financial situation and preferences.

Importantly, unlike traditional markets, where fees have trended downward in recent years, cryptocurrency trading tends to be more expensive. Commissions can reach 5% per trade or more, but for many brokers they are much lower – from 0.5% per trade.

Now that we have dealt with commissions, let’s look at the main types of crypto exchanges.

Centralized exchanges

Centralized cryptocurrency exchanges (CEX) have a governing body that coordinates the operation of the platform. This tends to simplify the trading process by using an order book system.

Advantages of CEX due to which traders choose them:

  • High liquidity: Due to the large number of users and orders, trades on CEX are usually executed quickly and at the market price.
  • User-friendly interface: Centralized platforms are usually easy to use and understandable even for novice traders.
  • Wide Selection of Trading Pairs: CEXs typically offer a wide range of cryptocurrencies, allowing you to diversify your portfolio.

The most popular centralized cryptocurrency exchanges are Binance, ByBit, Coinbase, OKX, Upbit.

Decentralized exchanges

Decentralized cryptocurrency exchanges (DEXs) operate as blockchain-based applications that eliminate the need for intermediaries in trading between users. The priority of decentralized exchanges is to ensure confidentiality and control over user funds.

Here are the reasons why DEXs can be attractive to traders:

  • Control over private keys: DEX users manage their crypto funds independently, storing them in non-custodial wallets.
  • Increased security: Decentralized exchanges are less susceptible to large-scale hacks compared to centralized ones.
  • Censorship resistance: DEX runs on decentralized networks, making them resistant to censorship and government interference.

Among decentralized cryptocurrency exchanges, the most popular are Uniswap, 1inch, PancakeSwap, Curve.

Other types of exchanges

In addition to centralized (CEX) and decentralized (DEX) exchanges, there are other options that users should familiarize themselves with:

Hybrid exchanges. They combine elements of both CEX and DEX, offering a compromise between liquidity, privacy and security. They have increased liquidity and confidentiality, but at the same time, not all hybrid exchanges are equally reliable: before starting work on a hybrid exchange, you must carefully study the platform and its reputation. At the same time, like CEXs, hybrid exchanges depend to a certain extent on centralized management.

Peer-to-peer (P2P) exchanges. P2P exchanges cut out intermediaries, allowing users to independently trade cryptocurrency with each other. Thus, they provide not only maximum confidentiality for clients, but also complete control over funds. But it also means low liquidity and a less user-friendly interface, which can be difficult to operate – especially for novice traders.

How to choose a cryptocurrency exchange?

To choose a cryptocurrency exchange that meets your needs and fits your plan or strategy, consider these 5 factors.

The location covered by the exchange. Before choosing an exchange to trade with, make sure it covers your jurisdiction. Some exchanges are limited to certain regions. An exchange’s jurisdiction reflects not only its target market, but also where they are allowed to do business under certain cryptocurrency regulations. Some exchanges have website addresses specific to each country.

Level of liquidity. To access this liquidity, you should choose exchanges with a large active user base, where participants hold large amounts of assets and trade. It is worth noting that the liquidity of different cryptocurrencies can differ significantly. Low trading volume may result in a shortage of buyers or sellers of the investor’s desired coins. In such conditions, prices for buyers may be overestimated, and for sellers – underestimated. Liquidity is especially important during periods of high volatility, which is especially typical for cryptocurrency markets. When liquidity is low, volatility can increase, leading to even sharper price movements.

What types of cryptocurrencies can you trade. To search for the cryptocurrency you are interested in, just look at the list of assets offered by the exchange. However, traders interested in less common and less liquid assets may need to turn to smaller trading platforms.

Amount of commissions. As mentioned, fees on crypto exchanges and trading apps can vary significantly, but almost all platforms charge them. Before choosing an exchange, you need to familiarize yourself with its tariff policy and choose a platform whose commissions correspond to the type of transactions you make. Some exchanges offer their own cryptocurrency, the use of which as a fee may lead to a reduction in the fee. Instead of paying a commission on the currency pair you are trading, you will pay a commission in the form of an exchange token.

Safety. There is no 100% security guarantee on any exchange. investors should pay attention to platforms with a long history, a large customer base and a minimum number of security incidents. As a rule, information about the security measures applied is available on the exchange websites. Some exchanges offer insurance for user funds. Having insurance can protect investors from losses in the event of unforeseen circumstances, but such programs are rare and usually do not cover the entire volume of assets.

Don’t know how to choose a cryptocurrency? Contact a trader for help!

As you can see, the crypto market is a confusing, but dynamic and exciting area that can generate large profits due to high volatility. But high volatility requires a lot of knowledge. Therefore, if you have doubts about choosing the right cryptocurrency to invest in or that you can handle market conditions, it is better to seek help from a professional trader. He will be able to tell you how to avoid common mistakes when working with the crypto market and answer all your questions.

Therefore, do not waste time and order a free consultation from a trader at ParadTrade using the form below!