How Cryptocurrency Exchanges Differ From Traditional Ones

In the modern world, exchanges power trade, finance and many more other industries. In broad terms, an exchange is a legal entity that ensures the regular functioning of the organized markets of commodities, currencies, securities and financial derivatives. Trade is conducted with the help of standard contracts or lots, the size of which is determined accordingly to the regulatory documents of the exchange.

A Brief History of Exchanges

There are 2 types of exchanges: mercantile and stock. A mercantile exchange is a special kind of financial markets where sellers and buyers meet to have deals. It originates from barter relations that were established more than 9,000 years ago in Egypt, when farmers started changing their cows for sheep, corn for oil, etc. In its turn, a stock exchange is a financial institution that regulates securities market and is considered to be one of the most efficient tools for investing.

The roots of emergence of exchanges take place in XII-XV century from the bill fairs in Florence, Venice, Bruges, and London. In that period, most exchanges were mercantile, and they served the needs of trade. Founded in 1556, the Antwerp exchange is considered to be one of the first exchanges in the world. Contemporaries called this exchange ‘an endless fair’, because merchants from all over Europe participated in bidding. It had its own building under which an inscription ‘for trade people of all nations and languages’ was based.

The Era of Crypto Exchanges

To decentralize the system of money flow, Satoshi Nakamoto first introduced the concept of blockchain in 2008. Satoshi’s model was powered by coins which are known as bitcoins now. The first bitcoins were released in 2009 amid the unfolding financial crisis. The first bitcoin holders were miners who dedicated their computational power for network protection and support. Anyone who wanted to join this decentralized ecosystem had to get bitcoins first. The easiest way was to buy them from miners. Later on, the new types of cryptocurrencies emerged and the need for crypto exchanges arose.

A cryptocurrency exchange is a virtual marketplace where cryptocurrencies are traded for other assets, such as fiat money or other cryptocurrencies. Cryptocurrency exchanges perform exactly the same functions that any other exchanges do — they match the demand and supply. However, cryptocurrency exchanges differ from any other type of exchange in a number of ways:

• Volatility

The volatility of cryptocurrencies is higher than that of commodities, securities and fiat currencies. For example, during 2013, the bitcoin’s price rose by 5,500%. Such trend has never been observed in the history of stock or currency markets.

Securities markets have smoothly changing rates of return, that is why significant amounts of money must be spent for having modest profits, but cryptocurrency investors can get abnormal profits due to high volatility. However increased risk is the price for that. Huge volatility can instantly destroy a person’s investments. Success depends on the experience of the trader, his ability to quickly predict the movement of rates and conducting the market analysis.

• Volumes

At the time of writing, according to CoinMarketCap, the total capitalization of cryptocurrencies was $514 bln, while $16.613 trln had NYSE (New York Stock Exchange) — the biggest stock exchange in the world. Trading volume of cryptocurrencies per day was $26 bln and NYSE had $169 bln (coinmarketcap and NYSE data). These numbers give an idea how much room there is for cryptocurrencies to develop and how small they are in comparison with stock exchange ecosystem.

• Participants

Only qualified participants are allowed to trade on traditional exchanges. For example, at NYSE traders are divided into the following groups:

Specialists. These people work on trading venues. Their main function is direct contracting. Revenues are received at the expense of the commission (if they act as brokers), or in the form of a spread (if they act as dealers).
Commission brokers serve brokerage firms, executing orders of their clients.
Brokers in the hall of the exchange. Their task is to help other members of the exchange to execute orders without the right to work directly with external clients.
Registered traders trade securities at their own expense, exempted from paying commissions.

Access to the Internet is the only thing a person needs to start trading cryptocurrency. Comparing to traditional exchanges, it takes much less time and paperwork on crypto exchanges to actually make the first trade.. In addition they operate 24/7 which allows users to participate in trading whenever they want. As a result anybody can become a trader at a cryptocurrency exchange regardless of his experience, age, gender, geographical location and experience.