Cryptocurrency Exchange
Blockchain Cryptocurrency | Image credit: whyframestudio/Freepik

How does a Cryptocurrency exchange work and is it safe?

Author at TechGenyz Contributor

A cryptocurrency is a form of digital money that has taken the world by storm. In the early days, it was hard to get cryptocurrency from miners. However, things have changed for the better, and the general public can also buy cryptocurrency from exchanges located worldwide.

Unlike traditional currency, crypto coins do not exist in physical form. Hence, many people are confused about the way cryptocurrency is sold and bought in exchange. To quell your doubts, here is some information on the way cryptocurrency exchanges like FTX Exchange work.

What is a Cryptocurrency Exchange?

Cryptocurrency Exchange is a digital platform to trade crypto assets. Contrary to the belief, crypto coins are only one of the digital products traded at such exchanges.

Crypto Exchange
Gold coin bitcoin. currency. blockchain Technology | Image credit: ksandrphoto/Freepik

In reality, the cryptocurrency exchange functions more like a stock market. The only difference is the way the traders make a profit.

How does Cryptocurrency Exchange set prices?

There is no official global price for cryptocurrencies, and the exchange does not set its price. Several factors affect the prices of crypto assets, which include the actions of buyer and seller. The prices are calculated based on trade volume and the supply and demand of cryptocurrency from users. In other words, the higher the exchange, the more market-relevant prices you will get for your crypto assets.

How do Crypto platforms earn money?

A cryptocurrency exchange has several revenue streams. The most important ones are market making, listing fees, commissions, and fund collection for ICOs, STOs, and IEOs.

Trading Fees

Every person using the platform to buy or sell crypto assets on the exchange must pay a certain fee to the exchange, also known as commission. The exchange charges the trading fee for facilitating trade between buyer and seller. A leading platform like FTX exchange charges low trading fees (0.5%) as low fees bring the high trading volume.

Listing Fees

New cryptocurrency trading platforms charge listing fees as they have low trading values and the earnings are not enough to sustain the platform. You can find exchanges levying fees for coin and token listings.

Market Making

At some exchanges, you get a better price for your crypto assets. In market making, the exchange swaps the trade with another exchange that cancels the previous trade. The platform provides absolute liquidity to a specific cryptocurrency by asking the investors to submit both bids. The next step involves limiting orders on the exchange.

The traders collect the bid-ask spread over multiple trades in the form of profit, and the exchange gets revenue in the form of commissions.

Fund collection

Crypto platforms allow companies to organize a token sale on the platform. In this model, the exchange acts as a storehouse where people can buy chips before they are listed. The exchange collects fees from the fundraising company.

The cryptocurrency exchange earns a commission on total proceeds. If the final amount is large, it could mean a big payout to exchanges.

Is cryptocurrency exchange safe?

According to experts, 99% of crypto transactions are done on centralized exchanges. In centralized cryptocurrency exchanges, buyers and sellers trust their crypto assets to a third party. Transactors use the network of their peers and the exchange platform to complete the transaction safely.

The two keys are essential to complete the transactions. If the user forgets the key, he/she may lose access to the crypto asset. In a centralized exchange model, the cryptocurrency stores the keys but stores 90% of digital assets in cold storage (offline), making it difficult for hackers to rob the crypto assets.

In decentralized crypto exchanges, the platform does not store the keys of crypto assets, making all hackers’ attempts futile. Decentralized exchanges allow peer-to-peer transactions and settle the transactions between two individuals.

Other security measures

Cryptocurrency exchanges employ various methods to keep digital assets safe. Besides this, they also employ additional layers of security to keep digital wallets safe from hackers.

Multi-factor authentication – It is a well-known fact that passwords alone do not guarantee foolproof security. Hence, platforms like FTX exchange use multi-factor authentication for digital wallet access. In multi-factor authentication, the users are required to go through two-step validation. First, the user must enter the right password and then enter the code sent to the user’s registered email or phone.

After entering the code, the user can access the crypto assets in digital wallets. The cryptocurrency exchange also sends an email to the registered Email ID for every successful and unsuccessful login attempt.

To sum up, cryptocurrency exchanges are similar to stock exchanges in many ways. They have the best security technologies to safeguard the assets and efficiently use the interface to trade crypto assets on the platform.