What is an Exchange?
How do we use them?
- A cryptocurrency exchange is a digital marketplace where users can buy or sell different digital currencies. Some exchanges only support digital currencies whilst others support fiat purchases too.
- Exchanges act as the intermediary between buyers and sellers, taking a commission for the transaction
- There are two types of exchanges, centralised and decentralised
These exchanges have similar business models to a traditional stock exchange, they involve a third party that facilitates the trade, takes deposits and safeguards the holdings of its users. These exchanges can be used to trade fiat currency into digital currency. You can deposit USD or GBP and buy BTC or ETH in a single transaction.
Centralised exchanges use order books to facilitate trade, this is essentially a list of buy and sell offers including the number of tokens / shares / currency being offered.
this example taken from Kucoin shows the price on the left, and the amount offered at that price (middle column) and the cumulative amount being offered (right)
In the above example, the market is trading at 1.0233 (this was the last price a trade was made at) with 662.1252 units being offered. So what this means is, there is someone that is looking to buy 662 units at 1.0233. Say now that there is no one left that wants to buy at that price, the sellers will have to look for the next buyer which will be the price below.. there they will find this...
It's the next best price and its 351 units.
In this way the market finds a price depending on how much demand and supply there is.
These are interesting as they have no middle man, they are known as 'trustless' as they are built on smart contracts. They don't use an orderbook, instead they have an algorithm that makes a market for buyers and sellers using a liquidity pool. We cover this in more detail in our intermediate section here
It is good to be on a top exchange because the more trade that takes place, then the more you can be sure that you will get a good and fair price. To tell which is the top exchange we look at volume, which is a measure of how much trade has taken place on a given exchange. The exchanges with the highest volume at the time of writing are as follows:
If you are just starting out you will need to likely sign up to a centralised exchange like Kucoin. This will allow you to deposit fiat currency to trade. We have a guide here - so go sign up and get trading!