Cryptocurrency Exchanges And Trading Explained
Why do stock exchanges exist? If there are people that want to buy a stock and people that want to sell a stock, why do they need a stock exchange? The answer is surprisingly basic if you think about it for a moment. Let’s say you wanted to purchase some Apple stock, where would you go to buy that stock? You can’t call Apple to buy their stock, because the entire notion of stock is that Apple sold these stock shares to the general public. So if you wanted to buy five shares of Apple, you would have to track down somebody who owns that stock. And if he or she doesn’t want to sell the stock, you would have to track down somebody else.
This all sounds pretty tedious. And that’s where stock exchanges come in. A stock exchange is essentially a meeting place for buyers and sellers. Before the digital age, these meetings took place in physical space — if you wanted to purchase or sell stock, you would go down to the physical stock exchange and transact (or, more likely, you would commission a broker to trade for you for a small fee). With the advent of the internet and virtual trading, much of this practice has been digitized and takes place in virtual space. But the concept of an exchange is still the same. It is a place for buyers and sellers to meet up and transact with each other.
Exchanges For Cryptocurrency
Cryptocurrency is no different than any other asset, and cryptocurrency exchanges began to spring up in the 2010s, with Bitcoinmarket.com opening as the first exchange on March 17, 2010. In 2014, Mt. Gox, a crypto exchange that had been handling roughly 70% of all Bitcoin transactions at that time, closed down in a massive scandal. Hundreds of millions of dollars worth of Bitcoin (roughly 850,000 tokens) had been stolen from Mt. Gox after it was hacked. But crypto exchanges have come a long way from the bumbling and insecure exchanges of a few years ago. ChaneNOW, Binance, Coinbase, Gemini, and a host of other exchanges provide optimum security, ensuring the safety and security of their clients’ funds while allowing for split second transactions. The crypto exchange industry is arguably more robust than even the most trusted stock exchanges.
Each exchange offers the same basic services — matching up buyers and sellers of crypto — but the supporting features of each can be quite different. There are three primary considerations when deciding which exchange to trade on. The first is whether the platform is suited for beginners or advanced users. Many exchanges fill the screen with a bevy of useful information, but all of this information can be overwhelming for a beginner. ChangeNOW, for example, treats users to a seamless user interface with the most important functions and information, and trading is a breeze on the platform. In contrast, other platforms include a slew of useful information and features that experienced traders might desire, such as price charts, trade history, and the order book.
The second consideration when selecting an exchange is transaction fees. Each exchange service charges a percentage fee of each trade engaged in by the user. On some exchanges, fees can be as high as 2% per transaction. However, on other platforms, fees can be as low as .1%. You may not think that fees are very important, considering how minimal they seem, but when we get to the “trading” section of this post, you will see what a huge difference these percentage fees can make. So be sure to check the fees on an exchange before selecting it as your go-to platform. And if you do pick the exchange with higher fees, your choice should be justified by the wider range of useful features or information offered by the platform.
The third important consideration to take into account when selecting an exchange is which tokens are supported by the platform. These days there is much more in the crypto world than just Bitcoin. In fact, there are thousands of altcoins traded on crypto exchanges every day. Some exchanges support, or list, tens or hundreds of different crypto tokens, while others are restricted to just a few cryptocurrencies. If you plan on buying more mainstream crypto like Bitcoin or Ethereum, chances are that it will be listed. But if you’re getting into crypto for a particular token, you must make sure that the exchange you select lists the token you are interested in.
There are many people that invest in crypto. Even some institutional investors, like Paul Tudor Jones III, have begun to stash some of their wealth in Bitcoin. However, aside from this sort of investing, there is a wide swath of the community that engages in trading. Crypto investing and crypto trading sound like similar enterprises, but they are actually worlds apart. The most elemental difference between the two is that investors are generally in it for the long haul, while traders look for short term gains. Investors generally engage in intense research that is focused on the long term potential and if its daily price fluctuates wildly, or even dips for a considerable amount of time, the investor holds on to their assets. Daily fluctuations and down periods do not phase the hardy investor, because he knows that eventually the price will go up.
A crypto trader is an entirely different sort of person. Traders try to take advantage of crypto’s daily price fluctuations and capture the trading upside available in such volatile assets. Let’s imagine the typical day of a crypto trader. He wakes up at 9am and checks his current crypto holdings, which stand at 0.5 Bitcoin (roughly $10,000). By 10am Bitcoin’s price has increased 1% and our trader’s 0.5 Bitcoin is now worth $100 more than it was an hour ago. At this point, our trader will likely liquidate his holdings, and now wait for the Bitcoin price to dip below what the price was at 9am, at which point he will exchange his $10,100 for something resembling 0.505 Bitcoin. Or, he will purchase another token, like Ethereum, in the hopes that it now rises just as Bitcoin did. Lather, rinse, repeat. Our trader will continue this process throughout the day hopefully making a nice profit from crypto volatility.
Traders should be concerned with two primary limits on trading profits (other than the obvious notion that prices can go down or up at an inopportune time). Firstly, every exchange platform carries trading fees. As discussed above, for each exchange (or swap) you make from fiat currency to cryptocurrency and back again, the platform charges you some percentage of the trade in fees. For example, if you exchange $200 for X Bitcoin, the platform may charge a 0.5% fee, which amounts to $1. Before you laugh off that miniscule fee of $1, remember that traders typically make only a few percentage points off of each trade, often as little as 1%. This means that the 0.5% fee amounts to roughly half of a trader’s total profits — not so miniscule after all.
The second thing for a trader to be aware of is that crypto trading requires constant monitoring to take advantage of the opportune times to buy and sell. Of course, there are mechanisms like limit and stop orders that allow for a certain degree of automation in the process, but unless you are able to program your own functional trading algorithm, you will still have to check in on prices very often. Many traders enjoy the thrill of watching their small gains at first, but their enthusiasm eventually fizzles out as the small gains made from each trade no longer get them going, and they do not have the patience to sit and monitor prices constantly. If you want to trade successfully, you have to motivate yourself to get excited about the incremental profits by recognizing the potential of sustained growth over a long period of time. Fees and constant monitoring define the life of a crypto trader and if you want to make a profit trading, they will define your life as well.
Crypto exchanges are the average person’s window into the world of crypto and crypto trading. Without exchanges, we would have to hunt down buyers and sellers and rely on their trustworthiness as trade partners. We are lucky to live in an era with secure and efficient exchanges where we do not have to worry (as much) about our crypto being stolen from the exchanges we trade on. However, if you want to trade crypto, you must be cognizant of fees and continuously monitor crypto prices if you want to make a profit. Otherwise, you won’t need a hacker to lose all of your money, as you’ll be able to take care of that yourself.