Understanding Fixed and Floating Exchange Rates
By SwapSpace on The Capital
Today, the extent of cryptocurrency market trades has reached $5 trillion daily, and the figure is likely to grow in the future. In this respect, it is essential to know the differences between two key notions: fixed and floating exchange rates (sometimes referred to as the exchange flow).
Fixed and Float Rates: The Definitions
An exchange rate shows how much money you’ll give to receive the same value but in a different currency. To put it simply, you can see how much of one currency you can gain for another currency.
Fixed and float rates have been used on the market long before cryptocurrency came to existence; these notions apply to both traditional and digital currencies.
Floating (or flexible, standard, classic) rates depend on actual free-market forces; neither governments nor trade limits interfere with them. The price of a currency fluctuates all the time in response to how much currency is present on the market. When it is in high demand, its value climbs up and, vice versa, there is a decline in prices with low demand. Thus, the currency is like any other product: its price is frequently changeable according to the number of buyers.
Cryptocurrency exchanging platforms that use flexible rates follow the information on the market trades, where rates are always changing, and display real-time figures. When a person tenders some money, a system analyzes the erratic rates and puts forward the most favorable ones. However, the rate can change at any second during the operation — that is why it is called floating.
Fixed rates for fiat currencies are set by governments through central banks. The authorities normally have considerable foreign reserves and utilize single currencies or baskets to keep the national currency price on the same level. However, it may be adjusted when necessary: the central bank may intervene in foreign exchange markets for that purpose.
Cryptocurrency is not controlled by governments. Instead, exchanging platforms working with fixed rates take responsibility to provide stable figures. If you start such an exchange, the amount on the screen will remain the same until the end of your operation, despite the volatility of the market.
Strengths and Weaknesses
With floating rates, you will be offered the best rate on the market. SwapSpace automatically finds variants and shows you possible options. The fees are usually minor, compared with the fixed ones.
Market fluctuations may become beneficial or disappointing. If the rate increases while you are exchanging, the final amount of currency will be larger. However, the opposite situation is not impossible: some users lose and receive less than expected.
As for fixed rates, such risks are gone: you know from the very beginning how much you are going to have. The stability implies higher fees, though: it might be frustrating with fixed transactions. Besides, you lose the potential advantage that could pop up with floating rates.
Fixed Exchange Conditions: Digital Currency Platforms Review
If you decide on the fixed rates, the next step is to study the exact figures offered by exchange platforms and consider the time the rates are locked for. Don’t get confused about the term “fixed”: the amounts are fixed, indeed, but the time is quite short.
Most of SwapSpace integrated services freeze the rates for 20 minutes: SimpleSwap, ChangeNOW, Changelly, and Godex exchange are among them. InstaSwap secures the rates for 50 minutes. Exolix with its 120 minutes (2 hours) is the record-breaker; in comparison, FixedFloat ensures a transaction for ten minutes only.
Which exchange rate is better? There is no one-size-fits-all solution: the unpredictable nature of the market makes both fixed and float rates preferable under different circumstances. A successful trader must take into account many factors and evaluate all risks; the strength and weaknesses mentioned above will help you make the right choice.
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