How Do Bitcoin Exchanges Work – As the interest for bitcoin and cryptocurrencies grows, it is important to understand how the technology driving them works. It’s also important to understand the ecosystem as a whole. The reason is that you are likely going to invest money that you want to grow in the future. As your money is hard-earned, it is wise to learn about all the nooks and crannies of the crypto ecosystem.
Decentralized cryptocurrencies like bitcoin are a payment network in and of themselves. Therefore, you can send other people these cryptos directly, no matter where they live. However, if you want to convert one cryptocurrency to another, you need the help of cryptocurrency exchanges.
What Is A Bitcoin Exchange?
A bitcoin exchange (or cryptocurrency exchange) is a digital marketplace where you can buy bitcoin and other cryptos with fiat or other cryptos. For example, you can buy bitcoin in Canada with CAD via Canadian crypto exchange. You can also simply exchange one crypto with another.
Therefore, in essence, it’s a place that acts as an intermediary between buyers and sellers. Most exchanges list multiple coins and multiple trading pairs to provide their customers with the flexibility and options they need. This is important for diversification purposes that any investor would be looking for.
How Does A Bitcoin Exchange Work?
For a bitcoin exchange to work, many different parts have to come together to form a synergy. First, there needs to be a system that allows users to sign up and create an account. Exchanges need to ensure that their personal data, including their KYC data, is always safe and secure.
Then there needs to be a robust wallet system where users can store their cryptos safely. Add to that, the functionality of easy transfers as well. There also needs to be a solid payment system so that users can buy crypto with their fiat using any of the fiat on-ramps.
To top it off, bitcoin exchanges also have to create a clean looking user interface (UI) and really simple and easy user experience (UX). This has to be done so that users of the exchange can go through their crypto dealings without any headache.
All of this comes together to allow exchanges to offer smooth trading services. A place where they can match buyers with sellers so that currency conversion can take place. Similar to the traditional stock market, buyers and sellers can choose to buy or sell their bitcoins by creating a market order or a limit order.
A market order is one where the buyer or seller agrees to trade his coins for the best available price at that point in time. At times of high volatility in price in the crypto markets, this can result in wild fluctuations and you receiving a price that may not be what you were looking for.
A limit order is the better option where the trader wants to execute his trade only at a specific price point. When price movements take place in either direction and when the trader’s price point is reached, the trade is automatically executed. When enough traders place their limit orders, it creates what is known as an order book. This is basically a collection of the limit orders set by different traders and it gives a glimpse of the interest in a particular coin.
When trades happen, the traders are also charged a small fee (often known as a trading fee) that is automatically deducted as the trade takes place. The same happens when a user is transferring his coins from that exchange to another one or in his hardware wallet.
All of this may sound really simple but it takes a lot of coding and testing behind the scenes to build and keep running day in and day out. Along with this, the exchanges also have to ensure the security of their system so that it cannot be manipulated.
Also, a bitcoin exchange is not just a bitcoin exchange. It needs to keep listing many other coins as well so that users have many options. This also allows for trading on multiple pairs and diversification of their portfolio. Therefore, a cryptocurrency exchange has to study and list more coins over time.
Finally, the exchange needs to have a robust customer service that is able to solve any problems that users face. During the course of trading or transferring and receiving cryptos, they may face problems. The customer service executives need to be able to help them as soon as they can.
All of these different aspects come together to keep a bitcoin exchange running smoothly. It is important that the systems are all quite secure and strong as the number of people entering the crypto markets will only increase with time.
Where Is Bitcoin Legal?
Cryptocurrencies have taken the world by storm ever since their arrival. Many countries immediately made efforts to understand them and capitalize on them. However, there are also countries that couldn’t quite understand this cutting edge technology. The following is a list of the countries where bitcoin and other cryptocurrencies are legal:
- The United States of America
- South Africa
- South Korea
These are just 18 of the more than 111 countries where bitcoin, eth, litecoin, and other cryptocurrencies are perfectly legal. In places where they are illegal, the governments might decide to change their minds in the future watching all the other countries take advantage of cryptocurrencies.
We hope after reading “How do Bitcoin exchanges work”, you have a better insight on how this exchanges work around the world. Also, check out How to profit from Bitcoin to learn how you can invest your money in digital currencies.
How do Bitcoin exchanges work