How does a cryptocurrency exchange work?
A cryptocurrency exchange is simply a platform that matches buyers of cryptocurrency with sellers.
For the most part, it works just like a normal exchange for any other asset, such as stocks. But unlike traditional exchanges that have set trading hours, cryptocurrency exchanges are active 24 hours a day, 7 days a week.
To make a purchase on an exchange, a buyer first has to fund their exchange account, also known as a wallet. This can be done with local currency or another cryptocurrency.
The buyer then places a ‘buy’ order on the exchange. This is a request to buy Bitcoin or another cryptocurrency at a price of their choice. This and all other ‘buy’ and ‘sell’ orders are added to the ‘order book’.
The order book is a list of the amounts of cryptocurrency that all the traders want to ‘buy’ and ‘sell’, and the prices they’re looking for. The exchange essentially acts as a matchmaking service between the two.
It’s important to note that exchanges do not set the prices. The laws of supply and demand do. The exchange is just the intermediary connecting the buyers and sellers. This is the reason that you may see slight variations in the price across different exchanges.
There are lots of different exchanges, and they have varying degrees of security, and privacy, but they all charge a fee for their trading services. Make sure you do your research on the team and security level of an exchange before using it.