Exchanges are where all the action happens!
While it is in essence technically possible to trade cryptocurrency coins and tokens without exchanges, for the vast majority of traders and investors, it is simply not practical to completely avoid using them.
Legit exchanges provide a relatively safe, hassle-free, and high-liquidity environment for trading — allowing investors from all over the world to buy and sell cryptocurrencies without first needing to trust or even know each other.
Trading Pairs
Exchanges are formed in essence by trading pairs. A trading pair is usually represented in the following manner: A/B.
A and B are simply two different assets. Most exchanges will only represent a pair in one way, that is, either by listing it as A/B or B/A — not both. It is therefore important to note that the actions of buying and selling are described with respect to asset A.
The order is crucial.
In other words, if you’re placing a buy order for the trading pair A/B, that means you want to pay asset B in order to get asset A. You’re effectively buying asset A. If you’re placing a sell order for the trading pair A/B, that means you want to pay asset A in order to get asset B. You’re effectively selling asset A.
This seemingly simple concept is important because if asset B is the asset that you wish to buy, then you’re not buying asset B but rather selling asset A as far as the trading pair A/B is concerned. If you hold assets in both A and B while attempting to trade, and you’re not clear about what you’re buying or selling, then you may just trade your assets in the unintended direction. Of course, you can always trade them back — but each trade usually comes at a cost.
Exchange Types
Broadly speaking, there are two types of cryptocurrency exchanges; those where you trade with the exchange itself and those where you trade with other traders. For this article, I will refer to the former group as Direct Exchanges and the latter group as Traditional Exchanges.
Direct Exchanges (Trading with the exchange)
In direct exchanges where you trade with the exchange itself, the process for making a trade is simple. Sometimes, depending on the exchange, you don’t even need to create an account!
All you need to do is access the trading pair on the exchange and input the amount that you wish to trade.
We will use BTC/ETH (Bitcoin against Ethereum) as an example.
If you wish to buy BTC using ETH, state the amount of ETH that you intend to sell and you’ll get either a fixed or estimated proposal for the amount of BTC that you’ll get in return. If the proposed rate is only an estimate, then the amount that you’ll receive back will depend on the current rate at the exact time that the exchange receives your ETH. Once you agree to the offer, you’ll be provided with an address to send the ETH to. This address is specific for your particular trade at the time. This means that your ETH can usually be sent from literally any source, so long as the amount received into that address is in a single transaction and equivalent to what you’ve agreed to trade.
There is usually a time limit for sending your assets imposed by the exchange after an offer for a trade is made. Given the particularly volatile nature of cryptocurrencies, this time limit will be relatively shorter if the trading offer is fixed.
In the case of BTC/ETH, the two currencies do not exist on the same blockchain distributed ledger technology (DLT). As such, this particular trade would require you to provide an Bitcoin address to which the BTC would be sent after the exchange receives your ETH. When cryptocurrency pairs exist on the same DLT, however, the provision of a receiving address by yourself is not always necessary as the asset being bought could, if you so choose, be sent to the same address that paid.
By its very nature, nearly all direct exchanges are centralised.
Traditional Exchanges (Trading with other traders)
Traditional exchanges can be either centralised or decentralised.
Centralised Exchanges
Centralised exchanges are run by companies with their own set of dedicated employees. Everything that happens as well as all funds within these exchanges are ultimately controlled and overseen entirely by the company.
In order to use them, you would be required to send your funds to addresses owned by the exchange but allocated to your account. These allocated addresses can be found when you navigate to the deposit section of the exchange and attempt to deposit funds. It is important to note that all assets present in the actual deposit address, including those that you’ve sent, belong entirely to the exchange and not to you. After successfully receiving your funds into the deposit address, the exchange will then grant you an equivalent amount of the asset that you’ve sent (minus deposit fees if there are any) by crediting your trading account within the exchange’s interface. You may not have the option of seeing these credited assets directly on the corresponding DLT if you were to interrogate it outwith the exchange — if you can even interrogate it at all.
Unlike the process for trading with exchanges detailed above, no prior notice needs to be given when you want to deposit funds for most exchanges. This means that at any time, any deposit from any source into your allocated deposit address will be credited to you.
When you want to regain full control over your funds, withdrawals need to be made from the exchange to your personal address on the corresponding DLT. You can only withdraw up to the amount that you are credited with on the exchange’s interface. In order to withdraw your funds, navigate to the withdrawals section on the exchange’s interface and provide your withdrawal address along with the amount that you wish to withdraw. Please note that the withdrawal address for a given asset needs to correspond to that asset’s DLT. You can’t withdraw Bitcoin to an Ethereum address, for instance.
Due to the inherent nature of withdrawals, checks are far more rigorous when it comes to taking assets out from an exchange. Most exchanges would have a few layers of security such as secret answers to predetermined questions, 2-Factor Authentication (2FA), email confirmation etc. Only by getting through all the security measures would your withdrawal be confirmed. Even after confirmation, withdrawal requests may remain in the approvals or verification stage on the exchange’s end for varying periods of time (during which some exchanges may still allow you to cancel your withdrawal request) before being finally sent to your personal address.
Unlike deposit fees, most exchanges do have withdrawal fees. These fees should be clearly stated and, depending on the exchange, may be taken either from the amount withdrawn or from the amount left over. For example, if an exchange’s withdrawal fee for Ethereum is 0.001 ETH, and you wanted to send 0.01 ETH out of your exchange-credited balance of 0.02 ETH, then the exchange will either take the 0.001 ETH from your withdrawal amount such that only 0.009 ETH gets to your personal wallet, or allow the full 0.01 ETH to hit your personal wallet and deduct the 0.001 ETH from the remainder of your credited balance instead such that you would only have 0.009 ETH left on the exchange. Of course, for the latter example, the exchange won’t allow you to withdraw more than 0.019 ETH since the last 0.001 ETH will be taken as fees.
Trading happens entirely within the exchange. This will be discussed in more detail later in the article.
Decentralised Exchanges
Decentralised exchanges are generally run by the community instead of a company, although they are still typically backed by a team that is responsible for their smooth running. Trades are made between cryptocurrency investors directly, and assets are rarely if ever stored on the exchange itself.
In order to start using a decentralised exchange, you typically need to unlock your personal address on the exchange itself — and yes, this could involve inputting your private key into the exchange’s interface if that is the way you usually unlock your address. It is therefore wise to create a brand new address before you start trading, transferring only the funds that you want to sell to that address and then unlocking that address on the exchange with relative peace of mind.
For explanation purposes, this unlocked address will henceforth be referred to as the main address.
Deposits, withdrawals, and asset management are done slightly differently from centralised exchanges. While trades do happen directly between traders, a deposit from the main address into an address-specific “trading address” within the exchange itself usually still needs to be made in order for those assets to become available for trading on that exchange. Each main address has its own dedicated trading address. Unlike centralised exchanges, however, the team does not usually have control over those trading addresses.
While deposit addresses in centralised exchanges allow funds from any source, trading funds in trading addresses on decentralised exchanges can only come from the main address. The same is true for withdrawals. All withdrawals from the trading address, when made, go directly into the main address. Deposit and withdrawal fees may also be involved as described above, but these are generally cheaper as compared to centralised exchanges.
A majority of decentralised exchanges only operate off a single DLT — mainly the Ethereum network. These are the decentralised exchanges that have been described above. There are some decentralised exchanges that operate off multiple DLTs, but those are less common and work slightly differently.
Trading
The actual activity of trading within traditional exchanges is fairly standard regardless of whether the exchange is centralised or decentralised.
This section assumes that you’ve read and understood an earlier section in this article entitled “Trading Pairs”. It would be a good idea to reread that section above before continuing to the content below.
The first step is always to locate the correct trading pair. Are you trying to buy A and sell B, or buy B and sell A? You’d need to first locate the page on the exchange that deals with the A/B pair. This may, of course, be represented as a B/A pair instead, so keep your eyes peeled!
We will use the BTC/ETH pair as an example again.
Instant Buy/Sell
If you want to buy BTC instantly using ETH, look at the SELL orders. The cheapest sell order is the price that you’d be making your instant purchase at. If this order is greater than the amount you want to BUY, then you can safety buy everything at the price that this SELL order stipulates.
Simply:
- Key in the amount of BTC that you want to BUY using ETH
- Key in the lowest SELL order rate (some exchanges key this value in for you automatically, labelling this the ‘market rate’)
- Press BUY
You’re effectively BUYING from the lowest SELLER (or sellers).
If, however, this SELL order is smaller than the amount you want to buy, then placing the same order would first buy up everything that’s being sold at that price. The remainder of what you want to buy will be converted to a buy order (since there are no more at that price for sale). At this point, you would then need to wait for a seller to sell you the rest of your order at the price you’ve stipulated.
If you want to continue buying instantly, then you’ll need to cancel the ‘leftover’ buy order and repeat the order at the next lowest selling price — which will be higher than your previous buy order. This will again let you buy instantly but at a higher price.
Keep repeating the process, keying in the remaining amount that you wish to buy and the new lowest sell order rate. Repeat until you’ve bought the amount that you wish to buy.
As sell orders are filled, prices go up as the next lowest sell order is reached — unless of course new lower sell orders are being placed simultaneously.
If you don’t want to repeat the process above multiple times especially for bigger buy orders, many exchanges have the inbuilt functionality of giving you the “best deal” even if you’ve put in an order that seemingly shortchanges yourself — be it by offering to buy above the lowest sell order or offering to sell below the lowest buy order. Those exchanges, in effect, do not allow you to shortchange yourself by buying at a higher rate than the lowest sell order and vice versa.
You can utilise this feature to do a true instant buy by attempting to buy BTC at a higher rate than the lowest sell order. The exchange would then buy up everything automatically from lower sell orders (at the ascending rates stipulated by those orders) until your demand is met.
If you wish to utilise this method, however, do so with caution. Look at the actual sell orders in terms of volume and price. Sometimes, sell orders are extremely far apart and you may end up buying the tokens or coins at a much higher rate than the initial lowest sell order.
Everything mentioned above is true for instant selling as well, except that it is all in reverse. If you’re instantly selling, you’re working against the lowest BUY orders.
Buy/Sell Orders
If you want to buy BTC for ETH, but you feel that the lowest sell orders are still too expensive, you can place a BUY order. A buy order is simply that — putting in an order and waiting for sellers to sell their BTC to you at the price that you want to buy it at. If you’re successful, this means that you’re buying it at a lower price than if you were to do an instant buy at that precise same time. The disadvantage is that your purchase isn’t guaranteed to happen within a certain time frame if at all.
Needless to say, when you’re placing the buy order (in this case using ETH to buy BTC), you’ll need enough ETH to cover that order. Once the order is locked, then the ETH you’ve dedicated to that order will be locked too until it is filled or until you cancel your order.
When deciding what price you should place your order at, you may want to consider the volume and value of the orders that are already on the exchange. Deviating too far from this could mean that your order will take a long time to fill and even may, as alluded to earlier, never fill at all.
Another thing to note is that the time order matters. If you place a buy order at the exact same value as others before you, then their orders will fill before yours. As with instant buys, orders may of course only fill in part — it’s not all or nothing.
You may cancel any open orders that you may have at any time.
Again, everything above applies for sell orders except in reverse.
Buy/Sell Stop-Loss
If you want to BUY BTC but ONLY if it goes HIGHER than what it is now, then you can put in a BUY stop-loss order. This means that you’ll buy BTC ONLY if BTC rises to the order that you’ve placed. Effectively, this translates to you paying more than if you simply do an instant buy order for a specified point in time. This is an option if you want to buy into a certain cryptocurrency but are only confident in it if it is able to reach that certain minimum value that you’ve stipulated.
If you want to SELL BTC but ONLY if it goes LOWER than what it is now, then you can put in a SELL stop-loss order. This would of course mean that you’d get less than simply selling your BTC instantly at a specified point in time, but at least you will not sell your BTC any lower than your order if the prices were to suddenly crash when you weren’t monitoring it.
Stop-loss functions are especially useful when trading because cryptocurrencies are extremely volatile.
Other Functions
Depending on the exchange, there may also be other trading functions that are available to you. Make sure that you understand exactly what they do if you want to use these. Some exchanges may also name the functions that I’ve covered above as something else in their own interfaces. Therefore, the core concepts are important to grasp.
The functions that I’ve discussed above are basic functions that every trader should know how to use.
Noteworthy exchanges
The titles are links that you can click on to learn more about each exchange!
Cashaa (Direct)
Cashaa’s next-generation banking wallet has a feature that allows it to act as a direct exchange. Users of the wallet are able to convert their assets in any way that they choose, provided that those assets are supported by the wallet. Notably, this wallet provides a fiat gateway for cryptocurrency purchasers as illustrated above.
Binance (Traditional)
Binance is currently the top traditional cryptocurrency exchange. It is certainly a good place to start learning about how exchanges work.
Potential Pitfalls
Scam exchanges
Given the meteoric rise in value and popularity of cryptocurrencies, exchanges have been popping up everywhere. A vast majority of these exchanges are absolute scams run by dirty individuals. Stay well away from them.
How do these exchanges scam?
Unfortunately, the list is endless, and many scams are at a company level. Exchanges sometimes charge a fee for listing. Scam exchanges have been known to take these fees (tens of thousands of dollars) and never list the native tokens belonging to the paying entities. At an investor level, scam exchanges simply take funds and never allow withdrawals — or make withdrawal processes so painful that it is practically impossible. Even if it is possible, traders are hit by exorbitant fees for anything and everything from depositing to trading to withdrawals.
The two exchanges that I’ve chosen above belong to the few that aren’t scams.
Keeping your assets on an exchange
Even if exchanges aren’t outright scams, they still aren’t the safest place to store your assets. If an exchange crashes completely, it could just take all assets with it. This is slightly less likely for decentralised exchanges, although that being said, some “decentralised” exchanges have been known to block withdrawals.
If you’re no longer actively trading your assets, do yourself a favour and move all your cryptocurrencies to a safer place. A hardware wallet is highly recommended for this task.
Summary
Legit exchanges are fun, but they may also be tricky to use! Many exchanges, in a bid to separate themselves from the pack, have idiosyncrasies that require some getting used to. Variations are vast.
When you first start trading on a new exchange, deal with a small amount first and once you’re more confident, you can then start trading larger amounts with relative peace of mind.
Good luck, have fun, and happy trading!
