How does a Bitcoin exchange work?

For those finding out about cryptocurrencies for the first time, there’s a lot to take in. First, you have to understand how Bitcoin, Ethereum, and other coins work, discover blockchain’s role in the process, and appreciate why some see this technology as a compelling alternative to fiat currencies.

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But the steep learning curve doesn’t end here. Anyone interested in owning a digital asset for themselves needs to think long and hard about where to buy them securely and for a good price. This is where crypto exchanges come in – and, when browsing the countless trading platforms that have popped up recently, there’s one thing you should bear in mind: they are not all created equal.

Cryptocurrency exchanges: How do they work?

Let’s go back to basics. Crypto exchanges have multiple purposes. First, they can help individuals and businesses convert fiat currencies such as dollars, pounds, and euros into cryptocurrencies. These platforms often serve as a bridge between the two economies – and, because fiat is involved, transaction fees and withdrawal charges can be higher than average. Most of the top crypto exchanges will offer “trading pairs” that pair major fiat currencies with mainstream cryptos, such as BTC/USD, ETH/GBP, and LTC/EUR. Don’t be disheartened if you are seeking to buy crypto using a local currency such as the Russian rouble or the Hong Kong dollar, as specialist platforms will provide the trading pair you need.

These platforms can also be used for crypto-to-crypto trading, a service that usually commands much lower fees. According to Nomics, a website that aims to provide transparent crypto data, more than 2,240 coins, and tokens are actively being traded at the time of writing. Cryptocurrency exchanges don’t tend to offer support for all of these assets. In some cases, you may need to convert your funds into Bitcoin on Exchange A, and then make another trade on Exchange B in order to get the coin you desire.

Many of the largest cryptocurrency exchanges require new users to complete a registration process before they can begin buying and selling coins. The levels of verification do vary – in some cases, confirming an email address will be enough, while others require applicants to upload a photo of their passport. These “know your customer” checks are in order to ensure that crypto businesses comply with anti-money laundering measures.