Summary
- An exchange is a place where cryptocurrency can be bought and sold.
- There are two main types of crypto exchanges – fiat-to-crypto exchanges and crypto-to-crypto exchanges.
- Crypto exchanges can facilitate the crypto trading process, matching bids to orders for the right prices.
- Crypto exchanges can also be defined by their level of regulation – some are centralized, others decentralized, and others still, a hybrid of the two.
- For more articles like this, please visit our Explainers pages.
What is an exchange?
Crypto exchanges are platforms that people can use to buy and sell cryptocurrency. For instance, someone may use a US crypto exchange to trade traditional dollars for cryptocurrencies or to trade one cryptocurrency for another. Some crypto exchanges may also offer custody — meaning they secure private keys needed to prove ownership of one’s cryptocurrency — and other services.
How do crypto exchanges work?
Crypto exchanges can help facilitate the crypto trading process, matching the right bids to the right orders for the right prices. These exchanges may provide tools and resources to make trading convenient and accessible. There can be exchanges where the seller of the cryptocurrency is the exchange itself, while other exchanges operate as the intermediary between two entities (a buyer and a seller) on the exchange.
The different elements of a crypto exchange include order books. These are considered a crypto exchange’s running list of buy and sell orders made by traders. This list is commonly sorted by price and may be used to determine when to execute orders for an optimal outcome.
There are generally two main types of crypto exchange orders:
- Market orders trade funds at the best available price in the market right away.
- Limit orders trade funds at a specific price. If the desired price isn’t available, the order won’t be executed until the price becomes available or the order expires.
What types of exchanges are there?
There are two main types of crypto exchanges:
- Fiat-to-crypto exchanges. These may be used to trade traditional currencies for cryptocurrencies and vice versa. They may also support crypto-to-crypto trades.
2. Crypto-to-crypto exchanges. These may be used to trade one cryptocurrency for another.
Crypto exchanges can also be categorized by their level of regulation, including:
- Centralized exchanges. These exchanges may be managed by third-party companies that can monitor transactions and set fees and standards.
- Decentralized exchanges. These exchanges typically have no third-party intermediaries and are instead run by peer-to-peer computer networks.
- Hybrid exchanges. These exchanges blend elements of centralized and decentralized platforms. The focus of these exchanges is generally to combine security features of decentralized exchanges with the order execution speed of centralized exchanges.
A version of this explainer first appeared on CCI member site, PayPal.
