What is the purpose of Bitcoin exchanges?

In the early days, the only way to get a hold of cryptocurrencies was to mine it or get it from another person, willing to sell directly to you. That is why people started looking for a simpler and safer option to get cryptocurrencies. This is where early cryptocurrency exchanges come in.

We have come a long way since the early days. In the past decade we have seen cryptocurrency exchanges rising around the world, contributing to billions of dollars in trading volume.

What is a cryptocurrency exchange?

Ever since the first form of currency, man found the need to trade it. Whether it be to obtain something or for profit, trading has always been associated with money and is more commonly known as forex (foreign exchange). But the very nature of cryptocurrencies requires a special trading platform, something built especially for the complexity of cryptocurrencies.

A cryptocurrency exchange or DCE (short for digital currency exchange) is a service/platform that enables clients to trade cryptocurrencies for other resources, such as other cryptocurrencies, standard FIAT cash or other digital currencies. They allow trading one cryptocurrency for another, the buying and selling of coins, and exchanging FIAT into crypto. Different crypto exchanges may have different options and features. Some are made for traders and others for fast cryptocurrency exchanges.

Centralized and decentralized exchanges

There are two types of exchanges when it comes to differing in the hierarchies of operation and governance, known as centralized and decentralized exchanges.

How do exchanges set their prices?

A common misconception is that exchanges set prices. However, this is not true. There’s no official, global price.

The exchange rate of a cryptocurrency usually depends on the actions of sellers and buyers, although other factors can affect the price. Prices vary depending on the activity of buying and selling on each of these exchanges.

Each exchange calculates the price based on its trading volume, as well as the supply and demand of its users. This means that the higher the exchange, the more market-relevant prices you get. There is no stable or fair price for bitcoin to visa

 or any other coin - the market always sets it.

How do crypto exchanges make money?

Exchanges make profit from different revenue streams, most popular four are: commissions, listing fees, market making, and fund collection for IEOs, STOs and ICOs.

Commission - trading fees

The most popular way to monetize exchanges (cryptocurrency and traditional exchanges) is to charge commissions in the market. This commission pays for the trade facilitation service between the buyer and the seller. Commissions can be as low as 0,1% per transaction and due to low trading cost bring in high trading volume.

Listing Fees

Due to competition, newly created exchanges struggle with low volume during their early stages and therefore need another source of revenue. Many exchanges opt for token and coin listing services to drive revenues. By organizing Initial Exchange Offerings (IEOs), Security Token Offerings (STOs), and Initial Coin Offerings (ICOs), exchanges may collect a percentage of funds raised from these offerings.

Market making

Another large revenue stream for cryptocurrency exchanges is the creation of a market or the creation of liquidity for a given financial instrument. In its purest form, market creation consists of buying and selling a digital asset on its exchange at slightly higher prices than on another stock exchange. When a trade happens on the exchange, they swap the trade on another exchange that offsets the previous trade, and the differences in the profit an exchange makes. This technique works exceptionally well when automated and used in long-distance markets (i.e., the difference between the bid price and the bid).

Fund collection

Another method to increase revenue is to equip the platform with an IEO module, which allows other companies to organize the sale of tokens. In this context, your exchange serves as a storehouse for people who buy chips before they go on an exchange - sort of like Kickstarter works. In this case, however, the authors of the papers receive tokens in exchange for other digital assets such as BTC or ETH.