Get to know how a Digital Asset Exchange works?
Powered by better connectivity through the widespread proliferation of the internet, Digital Asset Exchanges are emerging in different parts of the world. It involves parties buying and selling digital currencies based on market prices. Higher the demand more would be the value. Excess supply can lead to devaluation, which would lead to a loss of worth.
Equilibrium will be achieved in the market when the total supply equals total demand. It creates a situation where there is a common agreement between buyers and sellers regarding price and volume.
Two types of prices that play a major role in Digital Asset Exchanges
- Bid price – The price which the buyer is willing to pay is known as the bid price.
- Ask price – The price which the seller is willing to sell is known as the Ask price.
The price will vary depending on the exchange, period of holding an asset, the party’s knowledge of market conditions, and other factors that result in changes in the market.
Factors to consider before opting for a Digital Asset Exchange
- Since there are so many functioning exchanges, it is better to select one with an impressive track record of handling many successful projects.
- Go through customer feedback in discussion forums and social media sites to prevent falling for illegitimate exchanges.
- Availing the services of the Blockchain Transparency Institute will help in the verification of exchange and formation of better trust among traders and investors.
- Adherence to Anti-Money laundering (AML) guidelines is a must. It will help prevent the usage of money generated from illegal activities such as drug trafficking, and terrorism funding. Exchanges that don’t follow AML regulations may be blacklisted or forced to shut down.
- Meeting the norms related to Know your Customer (KYC) process. It involves verification of the identity of every customer, their financial background, the potential risk they can impose on an exchange. It helps in improving the integrity of the exchange as well as safeguarding the funds. Investors who do not complete the KYC procedure in their accounts should not be allowed to conduct trading activities.
Three kinds of orders to be handled in the market
- Market order – A fast way for traders to get in and out of a trade is a market order. It can be defined as an order to buy or sell at the best available price. It is executed instantly.
- Limit order – A specified level will be fixed beforehand. The trade will be performed when the price crosses the specified level. A buy limit order will be executed at the limit price or lower. The sell limit order will be carried out at the limit price or higher. A buy limit order must be used when there has been a fall in the asset price, but it is expected to rise after reaching the set level. A sell limit order should be utilized in the opposite situation when there is a rise in the asset price, but it will reduce after reaching the set level. A trader will benefit from Limit order as he has the freedom to determine the price. However, the execution of a trade will depend highly on the market price.
- Stop-Limit order – Two price points will be fixed. The points may be the same or different. A Stop-Limit order combines the features of a stop order and a limit order. Once the stop price has been reached, a Stop order transforms into a limit order. But Limit order may not be executed if the market price has not touched the limit price. Highly volatile assets get traded using Stop-Limit order as they would have a price guarantee.
Three types of Digital Asset Exchanges
- Centralized exchanges – The exchange acts as the intermediary by matching buyers and sellers with similar needs. Every transaction will involve a corresponding fee to be paid to the exchange. It consists of a robust network with a high trading volume. However, it is vulnerable to hacking as it has a single point of control. Some exchanges have coped up with the risk by taking insurance and establishing storage solutions. The pitfall of Centralized exchanges is that investors will not have access to their private keys and may never get back their funds if the exchange shuts down or crashes. Investors must create their own wallet outside the exchange and divert a majority of funds into it.
- Decentralized exchanges – It gives more freedom and flexibility to investors as all transactions are performed at a low cost without the presence of a middleman. Buyers and sellers can interact directly with each other through a peer to peer system. Unlike centralized exchanges, they cannot be hacked very easily as the hosting platforms are very secure. Investors will have greater control of their funds. However, they must not lose their private keys. If they lose access to the private keys, they will forego the ownership of the digital assets.
- Hybrid exchanges – It consists of a mix of features of both Centralized and Decentralized exchanges. Hybrid exchanges possess sufficient liquidity and top-notch security. It utilizes smart contracts for handling daily operations. Though the number of hybrid exchanges is rising, it is facing conflicts with the law in certain jurisdictions due to strict regulations.
How to choose the right Digital Asset Exchange?
Each business will have its own set of requirements. Those factors will play a key role in selecting the right type of exchange. Care should be taken to check the variety of cryptocurrencies or fiat currencies offered by an exchange. The efficiency of wallets can be tested by sending small amounts of money. Despite the difference in features and services provided by each type of Digital Asset exchange, traders must keep the majority of their holdings in their custody for better safety.
Follow all the above guidelines for selecting the best Digital Asset Exchange. Get in touch with Blockchain App Factory. Our experienced developer team will have a range of well-performing exchange solutions tailor-made for your business operations. Feasible solutions will be rendered for ensuring successful results.