Cryptocurrency Exchanges: The Key To An Investment Class

Those who cared to invest in one of the most obscure financial assets at the beginning of 2017 laughed their way to the bank at the end of the year. 

Most digital currencies made heady gains for the year, with bitcoin advancing 1,308 percent. XRP, the Ripple token currency, was up an even steeper 34,742 percent, and Neo soared 50,619 percent.

Joining The Bandwagon 

Investors who believe the cryptocurrency rally has further room to continue have several routes they can take to enter the space.

  • Exchanges: Investing in cryptocurrency can be done through an exchange, with the assets stored in a wallet, either on an exchange or offsite. Hardware wallets, which are physical electronic devices, are also available for managing cryptocurrencies. Coinbase, BitFinex, BitStamp and Gemini are some of the popular exchanges.
  • Online cryptocurrency brokers: These brokers allow trading a contract of difference, or CFD, which is a tradable instrument that moves in tandem with the underlying asset and is a contract negotiated between the broker and customer, according to TopBrokers.Trade. Traders don't own the underlying asset, but record profits or losses when the underlying asset moves in relation to the position taken.
  • The Bitcoin Investment Trust GBTC: The Bitcoin Investment Trust is a fund that owns bitcoins on behalf of investors in the funds, with each share representing ownership of about 0.092 bitcoin. Grayscale Investment Trust, which sponsors the fund, charges an annual management fee of 2 percent of the assets held by the fund.
  • Crypto stock plays: Investors have flocked to stocks with even the most remote connection to cryptocurrencies or bitcoin.

What Are Cryptocurrency Exchanges?

Cryptocurrency exchanges allow traders to buy, sell or exchange one cryptocurrency for another or for traditional currencies such as the U.S. dollar. Both trading platforms and peer-to-peer exchanges are available; trading platforms serve as an intermediary for connecting buyers and sellers in return for a transaction fee. 

Direct trading allows traders to connect among themselves, with sellers setting their own exchange rates. In P2P exchanges, software does the matching of the buyer and seller, with no human intervention required — except in case of arbitration.

See also: Cryptocurrency Mining: What It Is, How It Works And Who's Making Money Off It

How Do Crypto Exchanges Function?

Crypto trading occurs around the clock, with prices fluctuating constantly. To begin, traders must open an account with one of the exchanges after ascertaining its credibility and choose a wallet to hold the cryptocurrency. 

Some of the simple wallets are Coinbase Wallet; Mycelium, which is a mobile phone wallet; and Electrum, which is used on desktops. 

Crypto purchases can be funded using numerous financial instruments, with cash being the preferred medium due to the anonymity it offers.

This is how trading takes place on a typical cryptocurrency exchange, according to Coin Telegraph: A person selling a cryptocurrency specifies the amount and price, also known as the order. The orders are placed in a common order book. A buyer looks for a satisfactory order in the book and can place a buy order specifying the amount of cryptocurrency and the price at which they'd like to make the purchase.

An exchange acts as an intermediary and processes the trade by matching a buyer and seller.

After purchase, a cryptocurrency can be transferred to a wallet address, with the intermediary charging a small fee for the transfer. 

Purchases can be made in any denomination, ranging from fractional ownership to a whole cryptocurrency unit or more.

Cryptocurrency exchanges also allow the trading of bitcoin for an altcoin, which is the term used to refer to a digital currency other than bitcoin.

Choosing An Exchange 

Some of the criteria traders consider when choosing a cryptocurrency exchange are the location of the client; the security; privacy, fees; a fair exchange range; and financing options. 

Some exchanges based in other countries do not allow U.S. clients to trade on their exchanges. 

Coinbase; GDAX, which is owned by Coinbase and meant for professionals trading in digital assets; Gemini, BitQuick; Kraken; LibertyX; and itBit are some of the exchanges available for U.S. clients.

Exchanges such as Bittrex and Poloniex offer a wide variety of currencies. Poloniex accepts only cryptos for buying and selling, and no fiat currencies such as the U.S. dollar.

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