Over the last couple of years, crypto exchanges have been popping up around the world. Today, there are over 200 exchanges that conduct transactions using more than 7,000 pairs of crypto and fiat currencies.
What a Cryptocurrency Exchange is and How Does it Work
With the birth of Bitcoin in 2009, many other currencies were developed. What was needed was a trading platform. Hence came the creation of cryptocurrency exchanges. Traditionally, many financial exchanges are heavily legislated with many requirements to be met by all parties. Originally they would have operated in a “pit” but with the development of technology, they operate on a software similar to the way a cryptocurrency exchange work.
There are two types of crypto exchanges that offer various ways of asset exchanges;
Through a Decentralized Crypto Exchange (Pre-Programmed Software)
You probably know about stock exchanges like Nasdaq. The digital asset exchanges are very much like traditional ones. The difference is that there’s no brokerage intermediary and it’s completely decentralized. The alluring feature about digital exchanges is that buyers and sellers are able to directly trade cryptocurrencies with one another without any third party intermediaries to ensure all trades are processed correctly. Predominantly, these exchanges would operate solely with the exchange of just cryptocurrency.
Through an Intermediary (Cryptocurrency Company) – Fiat Exchange
In some cases, however, there are some cryptocurrency exchanges that act as an intermediary between buyer and seller. This way they can collect fees in order to profit from these exchanges. These types of exchanges would operate as a fiat exchange. In which physical currency can be traded for the cryptocurrency.
A Brief History of The Development of the Cryptocurrency Exchange
The frustration that comes with many exchanges whether they be crypto or not are the fees charged for the transaction. Fees can eat up a substantial amount of your profits over time. Especially if you’re buying and selling on a consistent basis and getting charged a fee for each trade. Over time many people began to favor decentralized crypto exchanges due to their complete omission of fees. With the recent popularity of Bitcoin, many other individuals started creating their own crypto exchanges in order to profit from the mass volume of trades occurring on a daily basis. In addition, many exchanges were set up to facilitate the trading of cryptocurrencies as there use had not yet become mainstream.
However, that’s not to say that these exchanges don’t have a dark history. Back in February 2014 one of the largest cryptocurrency exchanges shut down and filed for bankruptcy protection in Japan. This was purely to do with a large theft of Bitcoins from a digital wallet in which the intermediary stored all the transactions of buyers and sellers. As a result, these buyers and sellers soon became their creditors. In addition, many state-owned regulators in various parts of the world such as America (SEC) have begun to start regulating these exchanges in order to prevent this from happening on a mass scale.
Advantages and Disadvantages of using a Cryptocurrency Exchange
Advantages of Cryptocurrency Exchange
- No concentration of power. They are completely run by people.
- Low or no fees
- No central point of authority with decentralized exchanges means no government interference
- Decentralised exchanges have more privacy
Disadvantages of Cryptocurrency Exchange
- Longer trade times
- Lower liquidity (depending on the exchange)