History has it that the first significant transformation of the foreign exchange market, the Bretton Woods System, happened toward the end of world war II. It was the start of a new global economic order. The year 1973 saw the establishment of Forex or the foreign exchange market. And then, sometime in 2014, the world saw the first crypto exchange ever conducted. Since then, several such exchanges have come up, with one source claiming at least 312 of them today. What is a crypto exchange? How did it all begin? Is there a difference between forex and crypto exchange? Read on to know.
What is a Crypto Exchange?
Crypto exchange is a currency exchange platform that allows you to buy, sell, and exchange cryptocurrency or digital currency. You can use their services to convert one digital coin to another or purchase crypto using regular money. Think of them like markets that operate digitally. However, it would help if you remembered that most crypto trading platforms would first require creating an account to buy a specific virtual currency. Some exchanges will allow you to withdraw coins to add to your crypto wallets, but others will not. It depends on the particular platform that you might be using.
What About the Fees Involved?
Since cryptocurrency exchanges let you buy and sell digital currencies, the platforms charge a fee for the service rendered by them. The two primary types involved in these transactions are maker and taker fees, both of which are categorized on adding or subtracting liquidity,
Makers, as the name suggests, are those that help to create a market for other crypto traders and bring in liquidity. They add liquidity to the order book through limit orders (an order book shows the buying and selling activity, while a limit order is placed with the exchange to buy or sell an asset for the specified price). Liquidity is essential for any exchange platform because it’s the capacity of one coin being transformed into another coin or cash without compromising on the overall value of the currency. High liquidity indicates a stable market and attracts more buyers. Makers’ fees are usually lower than other fees since exchanges have an interest in increasing their liquidity.
Takers, as opposed to makers, decrease liquidity from an order book via market orders. They look for trading options that are filled quickly and immediately. Takers are involved in buying or selling orders in an order book and have to pay fees when they are carried out. If a limit order has the same price as the order book, it will be entered into a taker’s category.
Difference Between Virtual Exchange and Forex
Number of Workdays
The Forex market runs 24 hours for five days a week. Cryptocurrency exchange platforms function 24 hours all the days of the week. Crypto traders have to stay in touch continuously with the markets since digital currencies move significantly during the weekends.
In terms of market size, Forex is still a giant compared to crypto exchange platforms. As of 2021, the market size of Forex is about 6.6 trillion USD$. In the same year, the size of digital currencies is around 1.6 billion USD$ and is expected to grow to 2.2 billion USD$ by 2026. The reasons behind this expected growth are:
- Favorable economic conditions.
- Increasing acceptance of cryptocurrencies around the world, particularly in the USA.
- Enhanced software and hardware applications by significant companies.
Types of Instruments Used
There are six instruments in the Forex trading market: exchange-traded fund, option, future, forward, swap, and spot. Traders generally work in currency pairs, of which the Euro to US Dollar and US Dollar to Japanese Yen are the most common. In cryptocurrency, there are five special instruments: futures, CFD, margin, leverage, and swaps. According to sources, there are more than 6,000 crypto coins as of 2021. Because of the enormous amount, traders prefer to trade in a limited quantity of them.
This short introduction to the crypto exchange would have helped you understand its essential characteristics, fees, and related information. Investing in cryptocurrency can be significantly profitable, but you should do so only after understanding the process thoroughly.
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