Cryptocurrencies are digital currencies that are developed to provide people an electronic form of money that can be transferred without the interference of intermediaries. The first digital currency is Bitcoin; it is designed to facilitate peer-to-peer exchange in the digital realm. People can trade bitcoin for anything they want without requiring approval from payment apps, banks, or the government. For instance, if you purchase goods and services from a retailer or wholesaler, you can negotiate with them for the price and make the bitcoin payment per the agreed amount. This is the same as making payment in cash after negotiating for the goods and services.
Similarly, if you plan to purchase bitcoin, you can ask the seller to agree upon an amount of bitcoin that can be paid in cash in exchange for bitcoin. But this could only be done if you choose to buy bitcoin from a peer-to-peer exchange or in-person. Of course, most people prefer to use bitcoin for investment purposes and not really as a medium of exchange to make payments in daily life. This makes it harder for buyers to find peer-to-peer sellers ready to sell their bitcoins, which brings the liquidity concept. here is an amazing trading website designed to enhance traders' skills and experience.
Are you aware of the concept of liquidity? If no, let’s read about it.
Liquidity means the ease at which people can trade any asset, which completely depends on the market participants eager to trade in and out an asset. Talking about cash, it is the most liquid asset as it is accepted universally. Also, cash is easy to exchange for any asset, good, or service you want, making it most liquid. Comparing cash and car, the car is a less liquid asset as it still requires efforts to find the buyer who requires the car.
Talking about cryptocurrencies, bitcoin is a highly liquid asset out of all the cryptocurrencies. It amalgamates the number of buyers and sellers with a large volume of exchanges that take place daily. But still, in comparison with cash, bitcoin is less liquid as it also requires a buyer who needs bitcoin to use it for everyday purposes. This is the key reason why there was a need to develop the bitcoin exchanges.
What is a bitcoin exchange?
A bitcoin exchange is a service or marketplace that matches the buyers and sellers of the same needs. Exchanges also allow buyers and sellers to buy and sell bitcoins and other cryptocurrencies. Exchanges are the digital marketplaces that make bitcoin a liquid asset for all traders. While bitcoin is a decentralized currency, many centralized exchange platforms allow people to buy and store bitcoins that work similarly to custodial wallets. Bitcoin exchanges allow traders to trade bitcoin and other cryptocurrencies. Multiple bitcoin exchanges and trading platforms developed especially to make buyers and sellers meet the same requirements.
A centralized crypto exchange can be defined as an exchange or marketplace that takes custody of your digital tokens. But the exchanges have major security issues, and also, these marketplaces don't provide users complete freedom to use and trade their bitcoins as per their choice.
Working of Centralized Bitcoin Exchanges
Users must sign up for the crypto exchange and complete all the formalities by presenting the identity documents and completing the KYC and AML norms. Then, users need to fund their crypto exchange account with bitcoin, and this can be done by choosing a payment method like bank transfer to buy bitcoins. You can choose the payment method or currency that your exchange allows. You can make a trade by setting the buy order. All the buy and sell orders at bitcoin exchanges are combined in an order book maintained by exchanges to automatically make buyers and sellers meet. Crypto exchanges even allow traders to set limit buy and market buy orders.
While setting a market buy order, users only need to mention the number of bitcoins they want to buy and not. The exchange will automatically find the seller who wants to sell bitcoins offering the lowest price, making the trade possible.