How Do Digital Currency Exchanges Work?

In General Articles

When you first decide to invest in digital currency, chances are you're gonna have to go through an exchange to purchase it. To those used to traditional currency like US dollars or British pounds, the concept of “buying money” might sound a little weird and redundant. It's where exchanges are involved that digital currency behaves less like “regular” money and more like an investment. In this article, we're gonna clarify what exchanges are, how they work, and what you should look for when selecting an exchange.

To wrap your mind around the concept of a digital currency exchange, you need to think of cryptocurrency less as a form of money and more as a commodity, like silver or gold. Think less of a bank, and more of a stock exchange (where, indeed, digital coin exchanges get both their name and business models.) At Coin Pursuit, we've noticed we need to tread lightly when making that stock exchange comparison; it's a foreign and intimidating concept to a lot of potential investors. We like to assure them that even though it's based on the same sort of model, digital currency exchanges are nowhere near as complex as some stock exchanges. You don't need an MBA to use a digital currency exchange.

Investopedia tells us a digital currency exchanger is someone who “exchanges legal tender for electronic currency, or who exchanges one electronic currency for another.” In other words, you go to an exchanger with your dollars (or whatever traditional currency you hold) and exchange them for digital currency. Exchanges charge a broker's fee for handling your transactions. And there you have it; you're a cryptocurrency holder and investor! Want to trade your Bitcoins for Litecoins, or Peercoins for Bitcoins? Your exchanger will help take care of that, too.

Exchanges don't stop there, however; your exchanger can also serve as an advisor. The web pages of exchanges offer charts and statistics that show how a certain currency is performing—and if you're having trouble sorting through all that info, your exchanger, or broker, will be more than happy to translate them into easy-to-understand terms. Knowledgeable brokers watch trends and market fluctuations, and pass advice and recommendations on to their investors. They'll let you know when's a good time to buy, sell, or just let your investment ride for the time being.

Most exchanges also offer wallets for the storage and maintenance of your digital currency accounts. With your wallet, you can check your account balances and make transactions with other investors and merchants who accept cryptocurrency for payment. Holding a wallet with an exchange is not necessary; you're free to shop around and find a wallet that more closely fits your needs elsewhere. However, if you do sign up for a wallet with your exchange, ask about their security precautions, and if your wallet is stored offline when it's not in use—this is important to stop hackers from gaining access to your investment.

Poke around online, too, and do some of your own research. What is the exchange's reputation? Are they vulnerable to hacker attacks? Are they hands-on and helpful to their investors? No one wants a broker who takes the money and runs, never to be heard from again. Most exchanges are reputable, but every barrel has an occasional rotten apple.

You don't need to be a Wall Street guru to trade effectively and profitably in digital currency. Ask the right questions and do your homework, and your alternative currency investment is more likely to do well.

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