How Does a Bitcoin Exchange Work?
In recent years, Bitcoin exchanges have been mushrooming. Bitcoin in 2021, for the first time in history, reached a price level of $50,000. The surge in the price of the flagship cryptocurrency has made it one of the most discussed financial assets in the global economic space.
Moreover, the BTC price rally has become a catalyst for the arrival of many new investors on this market, who, first of all, set themselves the goal of making money on instruments growing at a wild pace.
To cater to the growing needs of these investors, special trading platforms – exchanges – act as intermediaries in the interaction of users with Bitcoin and other cryptocurrencies. It is here that a huge number of traders place their orders to buy and sell digital currencies, and special algorithms “bring together” buyers and sellers.
But if crypto traders make money on fluctuations in Bitcoin prices, then how does a Bitcoin exchange work?
Bitcoin exchanges and its components
Most of the interface elements of Bitcoin exchanges can be understood without special knowledge. For an ordinary Bitcoin trader, everything is extremely simple: he goes to the official website of the Bitcoin exchange, immediately sees multi-colored charts of prices and an interface for creating orders.
But for a user unfamiliar with trading, all this looks rather mysterious. So, let’s consider the main elements of the interface.
The user interface is just the tip of the iceberg, an crypto exchange needs the following components to keep it running smoothly:
This is the backbone of the crypto exchange. The kernel checks orders for the security of a financial asset – whether the user has enough funds to buy/sell a particular cryptocurrency. The kernel is also responsible for displaying prices, generating charts, order books, orders, etc.
Wallets for storing exchange funds
There are two types of cryptocurrency wallets used on exchanges – cold and hot. Cold ones are used to store the main assets of the exchange. Hot ones are needed to accept currency and withdraw funds to users.
Additional modules are responsible for order verification, non-trading operations, administrative operations, as well as for accounts, user registration, and authentication, settlements, etc.
The interface is the “face” of the exchange or those elements with which the user directly interacts. It consists of some of the standard elements like;
- Price charts
- Buy/sell orders
- My orders
- Trading history
- Trading platforms
- Market depth
- Price charts
The graph shows the history of changes in the exchange rate of the selected currency in relation to another. There are different types of charts, but most often they are presented in the form of lines or in the form of so-called “Japanese candlesticks”.
Each candlestick displays the change in the cryptocurrency rate in the selected period of time. Green candles indicate an increase in the exchange rate, red – a fall. The upper part of the “body” of the candlestick displays the rate at the moment the candlestick starts to form, and the lower part – the rate at the moment of the completion of the candlestick formation.
The time interval of the beginning and completion of the candlestick formation is displayed as numbers at the bottom of the chart. “Shadows” of the candlestick (lines coming out of the “body”) show the minimum and maximum values of the rate demonstrated for the selected period of time. Using various patterns, traders can predict the course development and place appropriate orders.
Buy and sell orders
Buy and Sell orders are a list of offers from traders. Orders can be displayed in the form of a list – an exchange “order book”. An order is executed when a corresponding sell offer appears in response to a buy offer.
The “my orders” tab displays the orders placed by the user.
This section displays transactions made by users.
In this block, the user can select a preferred trading pair.
This block displays the user’s assets. Here the trader can replenish the account or withdraw funds.
The depth of the market is displayed as a graph that shows the volumes of supply and demand. Buy orders are displayed in green, sell orders in red. The more sell orders (the higher the red area), the more likely the cryptocurrency rate will go up, and vice versa.
All this is necessary only so that traders working on the site have the opportunity to earn money on the sale and purchase of digital assets. The principle of earning is simple: market participants buy and sell cryptocurrencies in an effort to make a profit; site organizers earn commissions from transactions.
How Bitcoin exchanges make money
The income of the leaders of the crypto world, such as Coinbase, Binance, Kraken, can reach several million dollars per month, while the average crypto exchange is capable of bringing owners about $500,000 per month. These figures are formed thanks to the commissions that the exchanges assign for the deposit/withdrawal of funds and for trading operations carried out on the site itself.
Of course, not all exchanges can be highly profitable. The profitability of the site depends on its reputation and the quality of the implementation of the technical part. Reputation is created thanks to significant investments in marketing, and effective functioning is due to the honest and responsible attitude of the team to its project.
Most analysts are inclined to believe that the cryptocurrency market will be quite stable in 2021. This is a good point to enter the crypto-exchange business – relative calm will allow the founders to get comfortable in this area and slowly but surely move forward in development.