How Does The Bitcoin Exchange Work?

We are living in this digital world where technology has high priority. We did all the transactions by hand in ancient times without any intermediate party. Still, we need intermediary firms or organizations to make our work faster in this fast technological world. When the notes or coins came, people started using them to do daily transactions to buy necessities. Banks started working as intermediaries because it is tough to reach the people too far from us to give them cash. Similarly, Bitcoin is also a payment option that we use to do transactions (sending and receiving) and other purposes. Since bitcoin is a virtual coin, there is a need for a virtual space on the internet that can hold the bitcoin and take the record of bitcoin, and it is the working of exchanges. This trading software will help you learn more about bitcoin trading.

What is bitcoin exchange?

Blockchain is a platform that came into existence when launching bitcoin because there was a need for a space for recording all the Bitcoin transactions. There are some issues with privacy in blockchain, and people are more critical of their privacy. Anyone worldwide can see any other bitcoin users’ activity (transaction) via the website; thus, people do not want to show their transactions on this platform. Hence, the bitcoin exchanges come into existence to cover many issues such as instant buying and selling of bitcoins, hiding the transactional id of the user, instant sending and receiving, minimal transaction fees and many more things. Bitcoin exchange is a legally registered firm or organization that provides additional services and support to bitcoin users. 

Read: How Do I Transfer Bitcoin To My Bank Account?

What is liquidity in bitcoin?

Liquidity is a form of converting an asset into cash promptly. There are many highly liquidated things, and some things are hardly liquidated. To understand more clearly, selling a house, car, or bike is not the category of liquid assets because you have to make efforts to find the targeted buyer for selling these assets. Still, if you have gold, you can easily convert it into cash. Therefore, we can say that gold is a liquid asset. Similarly, bitcoin and other cryptocurrencies in the market are also highly liquidated assets because they can easily convert these coins into actual domestic money. The various bitcoin exchanges from liquidity provider provide the facility to sell the bitcoin at the correct value by matching the buyer with your selling price to convert this digital coin into cash quickly and withdraw some money into your bank account.

Read: Is Bitcoin Appropriate For Doing A Business?

Why are exchanges known as centralized systems?

The first Bitcoin transaction did through the blockchain platform that is open source, i.e. a lot of computers are working behind it to make the functioning smooth and straightforward. Not a single person or group of individuals is the owner or manager of the blockchain platform; instead, various computers are functioning behind the blockchain network worldwide. Since exchanges provide additional services and take charge, the profit from the costs goes to the exchange owners. Bitcoin exchanges are registered through the legal process, and some people are the owner or managers of the exchange. They have the right to ban the user from an exchange because it is a centralized system, in simple words. In these centralized means, the power of managing and controlling in the hand of central people (owners or managers) and on the other hand side blockchain is decentralized since many computers are functioning behind it.

Read: How Do I Start Investing In Bitcoin?

Money making process of exchanges?

Since bitcoin exchanges are not charitable organizations or not helping the bitcoin users buy and sell bitcoins for free on trading crypto platform. Thus there is a money-making model of bitcoin exchanges to earn profit by providing additional services to users. There are the following two making models of bitcoin exchanges given below:

  1. The first earning model is transactional fees, which means when you buy and sell bitcoin through the bitcoin exchange, the exchange will charge a transactional amount, and some parts will go to the miner, and some parts will go to the exchange owner as profit.
  2. Withdrawal fees:- Since bitcoin exchanges are the only platforms providing prompt withdrawal and deposit services directly from the bank account and other domestic payment methods, they will charge some withdrawal fees.

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