How Centralized Cryptocurrency Exchange Works: 2 Types of Platforms

In the XXI century, a phenomenon appeared that stirred the whole world. Cryptobirds quickly attracted the attention of investors, developers, programmers, and — a little later — regulators. It is no secret that by using such a tool you can significantly increase your capital.

To begin with, the definition of cryptocurrency exchange should be given, and there will be several of them:

A cryptocurrency exchange is a digital market in which traders can buy and sell bitcoins and altcoins at market rates.
A cryptocurrency exchange is an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency.

There are many cryptocurrency exchanges, and soon their number will be over a thousand. In this article, we will consider two types of cryptocurrency exchanges, as well as a more convenient trading option — a broker.

A trading core is the most important part of the exchange. The speed and correctness of all operations on the exchange depends on how functional the code is. The core performs several priority tasks:

Checks all issued orders for the security of financial assets. Put simply, depending on the current balance of the trader, it allows or forbids placing an order to buy/sell cryptocurrency;
Creates and changes records in the database when placing new orders and executing current ones;
Prepares data for display in the trading terminal: price levels, values for charts and stock glasses, a list of the last completed orders.

All the funds are stored on the wallets, and users transfer assets there for trading. There are cold and hot wallets.

A hot wallet is used to receive money on the crypto exchange and give payments to traders. It is always active and should have a positive balance.

A cold wallet is used to store the main amount of cryptocurrency. They are disconnected from the internet, which does not allow attackers to steal money from the exchange when it is hacked. An external drive or a separate computer can be used as a cold wallet.

You can find more information on types of wallets here.

A website is the most significant element for all traders. It must be functional, intuitive, and convenient, and support work with mobile devices. Using the web interface of the exchange, the user gets access to all the necessary functions:

Registration and subsequent verification of the account;
Deposit and withdrawal of cryptocurrency and fiat money;
Account balance, the ability to place trade orders for the purchase and sale of cryptocurrency;
Detailed statistics of all transactions in buying, selling, depositing, and withdrawing funds;
Stock charts for traded pairs, currently buy and sell orders, history of the last orders and so on;
Background and quick access to customer support.

We now turn to unofficial types of centralized crypto exchanges. Conventionally, they can be divided into two categories. The first provides an opportunity to buy a large number of various coins and hold them for as long as needed. The second provides a smaller list of coins, but a wider choice in terms of trading style, namely the ability to short and use leverage.

If we consider the first type, a platform should have one of the best interfaces and an excellent trading core. Multiple levels of verification and two-factor authentication are a must. The number of pairs traded is at least 100, and new coins are constantly being added. Sometimes there is a cryptocurrency in which you can pay a commission with a large discount. Large trading volume gives high liquidity, and the traded coins are added according to very stringent requirements and in the future can grow at least 5–10 times the current prices. The exchange will suit long-term investors, but when a coin grows, the terminal starts to hang heavily.

The second type is more suitable for active traders. It is possible to trade in both directions, that is, how to open short positions and long ones. Leverage allows you to repeatedly increase profits, while it is worth remembering that the risk increases. It is also possible to place stop orders to limit losses. But such exchanges have a number of drawbacks: first of all, the lack of regulation, a constantly hanging terminal during the growth of trading activity, frequent lack of liquidity, high commissions for depositing/withdrawing funds, as well as for the trade operations themselves, and a complex interface that makes it difficult to work with new traders. Besides, the margin is crooked, which can lead to premature closing of the stop-out (margin-call), if there is no stop-loss. In general, it is a bit strange, and the administrators of the exchange can trace unfair behavior.

It is also worth noting that both types of exchanges can be hacked, and there is an issue of trading bots because of which users often lose money.

It’s necessary to note that such distinction is based on the audience an exchange has chosen for its business operation. If the target audience is primarily young cryptocurrency traders, then the first type is more suitable. When an exchange wants to focus more on the experienced traders, then the platform should attract users with advanced trading tools. However, this is not the rule, and both young and experienced traders are using both types of exchanges.

For active trading activity, traders and investors more and more often use the services of brokers. Some are regulated by the Financial Commission, while exchanges may never receive full legal regulation. Other advantages include a convenient and intuitive MT 4/5 terminal, a wide range of technical analysis tools, the ability to regulate leverage, minimal commissions, high liquidity, and the small likelihood of hacking.

In conclusion, we note that the crypto industry will continue to grow, new exchanges and coins will appear. The sphere is very extensive and allows you to invent various know-how on its base; as a result, there will appear tools for investing. We can say that in the next 10−15 years the opportunity to increase their capital will remain.

How Centralized Cryptocurrency Exchange Works: 2 Types of Platforms

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