How Do Crypto Exchanges Work?
How do crypto exchanges work?
Centralized crypto exchanges (CEX) operate in different countries and support different local (fiat) currencies and different cryptocurrencies.
But they all work in similar ways. Let’s go over the steps:
- Create your account
- Verify your account
- Deposit funds
- Buy and sell crypto (“Trade”)
- Withdraw funds
Create an Account
To use a crypto exchange, you need to create an account. Even if you’re a wizard.
When you sign up or register for a new account, you’ll be asked to provide:
- Your email address
- A username and a password
- Your country of residence
Once you’ve submitted their required information, you’ll usually be sent an email and asked to confirm your email.
Verify your account
Once your account is created, the next step is to “verify” your account where the main purpose is to properly verify your identity. This requires going through a “Know Your Customer” (KYC) process.
In order to buy and sell cryptocurrencies, you’ll need to verify your account and will be asked for personal information such as:
- First and last name
- Date of birth
- Address
- Occupation
- Mobile phone number
You’ll then be asked to “prove” that you are who say you are and you live where you live. This is done by asking you for:
- Proof of identification (driver’s license or passport)
- Proof of residence (utility or cable bill, bank or credit statement)
Aside from these documents, they’ll require a selfie to make sure your current face matches the face on the ID.
Once your selfie and documents have been submitted, they will all be processed. If there are no issues, your account will be verified.
Depending on the crypto exchange, this verification process can be instant or take a few days.
Deposit Funds
Once your account is verified, you’re ready to start buying some crypto now, right? Well, not quite yet!
There’s one more step and that’s to fund your account with fiat currency.
Bank transfers, credit or debit cards, and payment apps are the more common ways to do it. Each has its pros and cons.
Let’s take a closer look at ways to “on-ramp” or convert your fiat into crypto:
Wire Transfer
Wire transfers involve filling out forms so that your bank can relay the info to a financial institution that enables the conversion of fiat to bitcoin.
Wire transfers can take a day or two (or more) depending on location. Sending moolah to a different country, for example, would take longer than if the financial institution is operating domestically.
Bank wires often incur lower fees than other options, so wiring remains popular especially if you’re an aspiring whale who is planning to buy large volumes of crypto
ACH Payment
Another way to send money to a financial institution is to link your bank account to it and let an Automated Clearing House (ACH) process your transfer requests.
The ACH network settles transactions in batches so transactions may take 1 to 3 business days to get approved.
Your financial institution may also limit the amount you can send or have specific cutoff times, so you’ll want to read the fine print before you choose this option.
Credit or Debit Card
Not willing to wait for your first bitcoin? Once you’ve made an account and have passed KYC, you can use debit or credit cards to instantly fund your account or even directly buy bitcoin and other cryptos.
The convenience is gonna cost ya though!
Debit or credit card purchases are best for low-volume transactions because fees charged by your bank, the credit card processing company, and the crypto exchange or financial institution can go somewhere from 0.75% up to 6% or even 10% of your transaction.
Ouch!
Some banks and crypto institutions also don’t allow credit card purchases. Keep close tabs on your card issuer’s restrictions as well as the crypto exchange’s minimum requirements if you’re considering debit or credit card purchases.
Buy and Sell Crypto
Once the crypto exchange has completed the transfer of the fiat deposit, your account balance will be updated and you can now buy and sell cryptocurrencies!
Some crypto exchanges will even allow you to start trading crypto “instantly”, meaning you don’t have to wait until your deposit completes.
Now that your account is funded, you can use this guide to place your first order!
1. Select a trading pair
Similar to the forex market, crypto prices are quoted in currency pairs or “trading pairs“. And look like this:
BTC/USD : $1,000
This means that 1 unit of bitcoin (BTC) equals $1,000.
The first currency in a pair represents the base currency, while the second currency in a pair represents the quote currency.
In a Buy order: you pay the quote currency and receive the base currency.
- For example, if you select “buy” BTC/USD, then you will pay in USD and receive BTC.
In a Sell order: you sell the base currency and receive quote currency.
- For example, if you select “sell” BTC/USD, then you will sell BTC and receive USD.
2. Fill out the order form
After selecting your trading pair, in order to buy or sell, you must fill out an order form.
You’ll be given at least two options on entering an order:
- Market order
- Limit order
A market order is meant for immediate execution at the current price so you’ll only be able to put the amount (or quantity) that you would like to buy or sell
A limit order will execute at the price you’ve set or better, once the current price reaches your limit price.
3. Submit the order
After selecting either a market or limit order, you can submit your order.
4. Wait for order execution
Once you can submit your order, you wait for your order to be executed or “filled”.
If a market order was selected, the order will execute immediately.
The trading platform will match you with a sell order at the lowest available price. If you’ve bought all that is available to be bought at that price. you will be matched to the next best price, which will be higher.
If a limit order was selected, the order may not execute right away but you’ll be able to monitor its status.
Limit orders may not be filled right away but you can view their status under “Open orders“.
In the below example, the BTC/USD price would have to reach $20,000 for the limit buy order to be executed.
As long as your order has not yet been executed, you are able to cancel the order.
Any order that has been executed or canceled can be viewed under “Completed orders“.
Withdraw Funds
At some point, you will want to withdraw your fiat or cryptocurrency.
- If it’s fiat currency, you provide your bank account details.
- If it’s a cryptocurrency, you provide your wallet address for that specific cryptocurrency.
Usually, crypto withdrawals are faster than fiat withdrawals.
How to withdraw fiat
In the same way, you can opt to buy bitcoin using wire transfers or ACH, these methods are also available as withdrawal options.
It’s a popular method because they incur lower fees, although the processing time can take longer.
In most cases, the withdrawal process looks like the following steps:
- Go back to your account dashboard.
- Head to the Withdrawals or Transfers section.
- Choose from the available withdrawal options.
- Input the amount in fiat currency (like USD) you wish to withdraw.
- Take note of the withdrawal fee and processing time.
- Double-check the transaction details then click Submit.
That’s it! Easy peasy, right?
You’ll likely need to confirm transactions via 2FA before it goes through.
The transaction could take a few hours or days to complete, depending on the crypto exchange, but you can check the pending withdrawals on your account dashboard.
How to withdraw crypto
After you bought some crypto, instead of selling them back for fiat, what if you want to send bitcoin (or other crypto) to an external wallet?
This is easily doable with just a few clicks and inputs!
To send bitcoin to one of your other wallets or to another user, all you need is the address or QR code of the wallet you want to send crypto to, and you’re good to go.
Just input the amount you wish to transfer and click Send. It’s as simple as sending an email!
You might also need to undergo 2FA to authorize the transaction, just to make sure that it really you who wishes to transfer bitcoin out of your account.
It’s the same process if you want to transfer your bitcoin to another exchange, you’ll also need the address of your wallet (for the specific cryptocurrency) on that platform.
Now that you know how to withdraw (or transfer) your crypto, it’s important that I mention one last thing…
CRYPTO WITHDRAWALS ARE IRREVERSIBLE.
Read that again. Internalize it. Inhale. Exhale. 😮💨
Make sure to double-check the address you are sending your crypto because once you click Send, there is no turning back.
One tiny mistake can mean losing your funds forever.
That’s right. FOREVER.
It’s easy to get things mixed up these days since there are similar-looking symbols like BTC, BCH, BSV, BAT, BTS… Oops, that last one is a K-pop boy band.
Sending crypto to an incompatible address (such as BTC to a BAT address) will also result in the permanent loss of funds.
You don’t want to end up like this dude:
He accidentally sent his BTC to an Ethereum address.
Whoops. 😬
And then right afterward, his girlfriend broke up with him. 💔
Now his bitcoins (and his gal) are gone forever. 👋