How Do Cryptocurrency Exchanges Work?

Team Luno
Team Luno
Oct 22, 2018 · 4 min read

We’ve come a long way since the days when buying Bitcoin meant mining your own or meeting someone in a coffee shop and paying cash.

Photo by Fancycrave on Unsplash

Before exchanges, getting hold of Bitcoin was a lot more complicated

You couldn’t just open a simple app like Luno and decide how much you wanted. At the very beginning, the easiest option was to load the Bitcoin software on a spare laptop and mine your own. Or you could find someone willing to sell directly to you (in person with cash or online), or even give it to you for nothing.

While those methods may have suited the niche community of early adopters, but times have changed. We need a simpler and safer option to bring access to more people. That’s what an exchange provides.


What is an exchange?

A cryptocurrency exchange is simply a platform for matching buyers and sellers. They work in a similar way to exchanges for other assets, like stocks.

People tend to refer to those who use them as ‘traders’ because they often buy and sell on a short time frame. Traditionally, an investor is someone who holds their investment for a longer time frame. Bitcoin exchanges are best suited to those with plenty of trading experience.

Cryptocurrency exchanges are typically active 24 hours a day, 7 days a week. By comparison, other types (such as stock exchanges) have set trading hours.

Exchanges tend to charge a small fee, usually a percentage known as a ‘volume-based fee.’ There may be a currency conversion fee if you deposit a currency not accepted by the exchange.

An exchange is not the same as a wallet, which is a place for digitally storing cryptocurrency once you’ve bought it. Some platforms, including Luno, provide both. Others don’t, which means traders need to transfer their cryptocurrency elsewhere.

Not all exchanges are created equal. As the official Bitcoin website explains, they ‘provide highly varying degrees of safety, security, privacy, and control over your funds and information.’


Buyers and sellers

To make a purchase, a buyer must first fund their exchange account. They may use local currency or another cryptocurrency. Most exchanges accept bank transfer or debit/credit card. Some also accept services like PayPal.

They then place a ‘buy’ order on the exchange, requesting to buy Bitcoin at anything below a maximum price.

For example, they might want 1 BTC at no more than 10,000 USD. A seller places a ‘sell’ order, offering to sell a certain amount of the Bitcoin for above a minimum price. This adds liquidity, meaning there’s more cryptocurrency available to buy on the exchange.

When someone places a buy or sell order, the exchange adds this to its ‘order book.’ An order book is a list of the amounts of Bitcoin traders want to sell, and the prices they’re looking for. The exchange acts as a matchmaking service between the two.

For example, a trader might want to sell 1 BTC at no less than 10,000 USD. The exchange would match them with a buyer looking to spend that much and the money would change hands.

If the prices don’t match, no sale happens.


Supply and demand

A common misconception is that prices are set by exchanges. This is not true.

Exchanges don’t set prices. They act as intermediaries connecting buyers and sellers, with supply and demand dictating the prices. This is why you might see different prices on different exchanges.

In countries with limited access, cryptocurrencies may trade at a premium and cost more than elsewhere.

There’s no official, global price.


The Luno Exchange

While we recommend sticking to the Instant Buy and Sell option if you’re not a seasoned trader, you can take a look at the Luno Exchange any time. Here’s an overview of the main features.

When you open the Luno Exchange, there’s quite a lot of information on the screen. In the centre are price charts, viewable in three forms:

  1. Candle — green and red vertical bars showing price changes during a specified time period, between 5 minutes and 7 days with grey bars denoting trading volume
  2. Line — a straightforward representation of price changes over a time period, between 1 day and 2 years
  3. Depth — showing orders waiting in the order book.

You can also see the order book, a form for placing an order, and a list of recent trades. Some exchanges offer other advanced options for highly experienced traders.

We’ve come a long way since the days when buying Bitcoin meant mining your own or meeting someone in a coffee shop and paying cash.

Luno Publication

Luno.com is a global cryptocurrency company, with over 2 million customers in 40 countries. We make it safe and easy to buy, store and learn about BTC and ETH. We strive to educate, and open the doors for dialogue and discussion on cryptocurrency, fintech, finance, and more.

Team Luno

Written by

Team Luno

Luno.com is a global cryptocurrency company, with over 2 million customers in 40 countries. We make it safe and easy to buy, store and learn about BTC and ETH.

Luno Publication

Luno.com is a global cryptocurrency company, with over 2 million customers in 40 countries. We make it safe and easy to buy, store and learn about BTC and ETH. We strive to educate, and open the doors for dialogue and discussion on cryptocurrency, fintech, finance, and more.