What is Exchange and How does it work? » Digital Forex

What is Exchange and How does it work?

If you're just starting to look for more information about cryptocurrencies, you might have come across the term “Exchange”, right? But do you know what an Exchange is?

As well as the Stock Exchange, which trades shares, in the world of cryptocurrencies there are also those responsible for negociação of digital coins.

And, in this case, those responsible are the exchanges, which work as a kind of cryptocurrency broker, trading bitcoins and various other cryptoactives.

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What is an Exchange Company?

An Exchange is a digital currency broker. It works as an electronic platform that facilitates the purchase, sale and exchange of cryptocurrencies and tokens.

These companies work by connecting buyers and sellers, ensuring a convenient and secure transaction.

There are some exchanges that only trade bitcoin currencies and others that have a wide range of digital currencies.

To start buying or selling, it is usually necessary to complete a registration form and, in some cases, submit some documents requested by the brokerage.

Importance of Exchanges

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In direct sales between users, it is impossible to know where the funds are coming from, which makes the transaction suspicious.

There is no impediment to the direct exchange of criptomoedas, that is, the negotiation of an asset between seller and buyer – since the entire transaction can be done over the Internet.

However, there is the issue of security and trust. Especially when the remittance of the amount in fiat currency or other digital currency is done in advance.

That is, when you pay first and then receive the cryptocurrencies you want to buy.

Direct sales between users is called P2P, and when it occurs, it is impossible to know the origin of the funds that passed through the buyer's account, especially in the case of fiat coins, which can be considered a suspicious transaction for some government agencies, and inspection.

That's why Exchanges exist, and that's one of the reasons you need to know what an Exchange is.

 

They work similarly to brokers traditional, offering a reliable structure and a safe environment, respecting all the legislation in force, for the purchase and sale of criptomoedas.

How does an exchange work?

Basically, an Exchange works by providing a suitable framework for the safe and responsible trading of cryptocurrencies.

For this, fees are charged to users and there are also the legal costs of each transaction, such as taxes.

In general, the exchange is a centralized location with different cryptocurrencies or tokens. How it works can vary depending on the company, and there are some possibilities, such as:

Direct Sale of Virtual Currencies

This is the simplest operating model, in which the exchange accumulates different digital currencies acquired at low cost and sells them at the current market rate plus service fees.

Exchanges generally accept fiat currencies (dollars, euros, etc.), bank payments, 'online' payments (such as via paypal), electronic wallets, or credit card payments and payment with cryptocurrencies;

Cryptocurrency Trading

In this case, the exchange works as a kind of “free market”. In other words, the exchange does not sell currencies directly, but works as an intermediary, helping buyers to find sellers and transact with each other. Therefore, for each transaction, a fee must be paid to the exchange.

Digital Currency Loan

Bitcoin or Ethereum In Digital Currency Invest

Consider that loans in digital currencies through Exchagens is similar to bank with fees.

This is a new model being adopted by some cryptocurrency brokers. These companies lend the digital coins they have to users in a similar way to a bank.

The broker earns by paying a fee for the loan;

Cryptocurrency Storage

This is a very common service offered by Exchanges that offer users the possibility to create local wallets to store their cryptoactives.

However, these wallets are not always the safest storage options, as if the brokerage goes bankrupt, it will take all your money with it.

Many even recommend that users keep their digital coins in these wallets for only a short time, transferring the value to a safer wallet and leaving only small amounts in the purse wallet for future transactions or purchases.

In order to operate, Exchanges do not need to follow any specific regulations, but the Internal Revenue Service requires a monthly declaration of each client's investments.

Fees charged may vary by company, for example with brokerage, deposit and withdrawal fees.

How To Trade In An Exchages?

Once you've chosen the best exchange for your needs, you'll need to register, send some documents and confirm your identity. You will then be able to choose whether to buy or sell the digital assets.

Most national Exchages work as digital currency exchanges, that is, making the connection between buyers and sellers. So it is this method of trading that we will explain.

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The platform also offers options for purchasing digital currencies via PayPal.

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If you want to buy digital coins directly from the exchange, the process is simpler, you just need to agree the amounts and make the transaction.

If the idea is to trade with other sellers, there are two possibilities: trade in the market (ie buy and sell directly) or with limit orders. Let's look at each of these possibilities.

Trading on the Market

When choosing a good Exchange it is important that you always research its owners and their history.

After depositing money in your account, the broker will release this amount in your account balance on the platform and you will be able to compare the buy and sell values ​​of the digital currencies offered by the company and the sellers' options.

Then you just choose the digital asset you want to buy and the value, to sell the digital currency is similar to the call option, when the digital currency reaches the desired value, confirm the transaction.

Trading With Limit Orders

This mode of operation is a little different, so it deserves a more detailed explanation.

How it works: the user can place a purchase order for a cryptocurrency at a price lower than the current quotation.

The system will wait until the price reaches your order value and only then make the transaction. Or you can place a sales order with a higher price and the same will happen.

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It is worth noting that if you place a buy order at a price above the current quote or a sell order at a price below the current quote, the order will automatically be executed at the price of the best sellers or buyers, taking into account the amount of cryptoactives you want to buy or sell.

So let's say you place a buy order for $50.000. You are telling other Exchange users that you are willing to pay $50.000 for 1 Bitcoin, for example.

If, at some later time, another participant places an order to sell for $49.000, it means they are willing to sell 1 Bitcoin for $49.000, but would agree to sell for the $50.000 you want to pay, then the transaction closes at $50.000 and the orders are withdrawn from the Exchange.

Another point is that this dynamic changes the brokerage fee charged by the broker.

Typically, the user who places the first order pays a lower fee (or may receive a percentage of the brokerage, depending on company policy) than the user who “removes” the Exchange order.

After all, it is understood that the first will provide liquidity to the Exchange, while the second will withdraw liquidity.

In addition to buying digital currencies and paying with fiat currency, you can trade digital currency pairs. For example, buy Bitcoin and pay with Litecoin or buy Ethereum and pay with Bitcoin. This, of course, as long as Exchange offers this alternative.

How to choose the best

When choosing a good Exchange it is important that you always research its owners and their history.

After depositing money in your account, the broker will release this amount in your account balance on the platform and you will be able to compare the buy and sell values ​​of the digital currencies offered by the company and the sellers' options.

Then you just choose the digital asset you want to buy and the value, to sell the digital currency is similar to the call option, when the digital currency reaches the desired value, confirm the transaction.

Trading With Limit Orders

This mode of operation is a little different, so it deserves a more detailed explanation.

How it works: the user can place a purchase order for a cryptocurrency at a price lower than the current quotation.

The system will wait until the price reaches your order value and only then make the transaction. Or you can place a sales order with a higher price and the same will happen.

It is worth noting that if you place a buy order at a price above the current quote or a sell order at a price below the current quote, the order will automatically be executed at the price of the best sellers or buyers, taking into account the amount of cryptoactives you want to buy or sell.

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So let's say you place a buy order for $50.000. You are telling other Exchange users that you are willing to pay $50.000 for 1 Bitcoin, for example.

If, at some later time, another participant places an order to sell for $49.000, it means they are willing to sell 1 Bitcoin for $49.000, but would agree to sell for the $50.000 you want to pay, then the transaction closes at $50.000 and the orders are withdrawn from the Exchange.

Another point is that this dynamic changes the brokerage fee charged by the broker.

Typically, the user who places the first order pays a lower fee (or may receive a percentage of the brokerage, depending on company policy) than the user who “removes” the Exchange order.

After all, it is understood that the first will provide liquidity to the Exchange, while the second will withdraw liquidity.

In addition to buying digital currencies and paying with fiat currency, you can trade digital currency pairs. For example, buy Bitcoin and pay with Litecoin or buy Ethereum and pay with Bitcoin. This, of course, as long as Exchange offers this alternative.

How to choose the Best Cryptocurrency Broker?

To choose a good cryptocurrency broker, you need to pay attention to some essential points, such as:
  • Find out who own the Exchange and look them up on the Internet, noting what other positions they have held, companies they have worked for and their background;
  • Evaluate Exchange on complaint sites such as Complain Here, as well as Internet forums such as BitcoinTalk, evaluating other users' experience with the broker, common issues, and how the company handles these issues;
  • Know the broker's history, analyzing when it was founded, who its partners are, the CNPJ and other essential information about a company;
  • Analyze the fees charged and what services are offered, as well as the cryptocurrencies traded;
  • Check if the cryptoactive broker operates in your country and complies with local laws;
  • Analyze the trading volume (a good indicator of the company's liquidity) and the ability to respond to user requests at any time of the day;
  • Evaluate the security issue, preferring those that offer two-factor authentication options, complex captchas, and anonymous sign-up.

Now that you know what an Exchange is, how it works and the main tips for choosing a good company, how about starting trading cryptocurrencies? We separate the best Exchanges in the market today, feel free to open an account for free.

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