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I have had this conversation multiple times, so I figure it is something others may need to get a better understanding of as well. What I am going to be dealing with is what it means when a currency gets on to an exchange, or when it is removed from one, as well as how the exchanges work, what to be aware of, and some other things in relation to coins and exchanges. There are a lot of false views floating around with what it means when an exchange adds or removes coins, so hopefully I will be able to shed some clarity on it.

The Politics of Exchanges

Exchanges are run by either a small group of people, or in some cases even a single person. This means that their decisions that affect everyone are based on a very small minority of who is out there. Rather than taking opinions from the users of the exchanges directly, some use the economy of the various coins (how many are being bought and sold over a period of time) to determine whether or not to keep the exchange live for each coin, or in some cases just using their best judgment.

What this leads to is a huge misconception as to whether or not a coin is “successful” because it was added to one or more exchanges. Really, it has no impact. All it means is that the owner or owners of each exchange felt that it was worth going for. It could be because they just believe in the concepts behind the coin, they like whoever released it, or they just think it would be profitable enough (and desirable enough by the users) to go ahead and add it. It could be the best coin in the world and not make it on to an exchange, or it could be the worst coin and still be on exchanges. These are mutually exclusive, in that neither one answers the question of the other.

Exchanges Earn Money

When an exchange decides to host a type of coin, they usually do so while taking a small cut (this can be a small percentage or it could be a flat fee, although the percentage is much more popular). This cut they take can either be used by them to turn it into another coin type or into cash, which helps pay for the server costs and other things. Without this income, the viability of an exchange is very low – it has costs that need to be paid back somehow. Taking the small percentage is better than donations in that the owner or owners can easily estimate how much they should be taking in, and make upgrades and such much more easily. Relying solely on donations or advertising revenue is much less consistent, leading to problems where you could see a sudden drop in revenue, despite still having similar trade volumes. A good way to view the fees is not as fees, but rather donations to help keep the service alive.

These fees add a problem with doing “day trading,” in that every time you make a trade you are paying another fee. If you want to make a profit off the trades, you have to be earning more than you are losing, and you must factor in the exchange fee as a loss. While it may be a very small fee (think like 0.2%), if you have made 100 trades that is effectively a 20% fee. If you only made 5% off all those trades, you are still down 15%. If the exchange you are using goes with a percentage based fee, it does not matter if you are trading a lot of coins at once or a small amount. If you are on one with a flat rate fee, however, dealing with higher volume trades will yield more profit than the same amount of coins but spread out over multiple transactions.

There are also another type of fee that we have not looked at yet, which is the withdrawal ones. Since fees are tacked on to most transactions that are sent, most exchanges charge that fee to your account when you decide to do a withdrawal. Much like the other fees, this is to help keep the change afloat, but you want to be aware of how much you are paying in this fee as well so you can add it as a loss.

Why Don't They Host All Coins?

When we looked at the politics behind exchanges, a big thing we saw is that they are often controlled by a single person or a few people. This is a big part as to why coins sometimes have issues getting added. If you request an addition and they do not like you for some reason, for example, you will likely have a harder time getting your coins up there.

Another problem is related to how they earn money: the fees. If there is a very small volume of transactions, the relative cost of allowing the transactions may outweigh the income that is received. In this case it makes sense to remove the coins, as bleeding money leads to nothing but problems and eventually a shut down of all other services. Think of it as being a “necessary evil” to remove coins.

Some coins are seen as not going anywhere, or are seen as “scams.” In these cases the exchanges are usually against them because while they do get a kick back from the trades, if the coins are worthless or near worthless there is still a problem with lack of value. If the coins are worthless, the exchange is earning little to no money off them, therefore we run into the same problem of needing cash to continue running. Of course, whether or not a coin will ever be worth anything is anyone's guess. Different people often have different opinions as to how far (if anywhere) a coin will end up going.

How Do Exchanges Benefit Us?

There are multiple types of exchanges: those that deal with transactions between people meeting in real life, those that involve a website that simply allows users to trade currency, and those that are in an Excel (or similar spreadsheet) document where people can contact each other. By far, the most effective ones are those that are on a website.

When you have coins you do not need or you have coins you need, an exchange allows you to easily check out their going rates, as well as quickly get your trades going. This benefits the entire economy because it helps shift the coins around, which keeps them healthy. There is some risk to those who are doing the trading (in that the coins they obtained may have little to no value in the future) but that is something not exclusive to the crypto currencies. You could purchase Magic the Gathering cards and then them lose their value as well.

Exchanges also help make the general public more secure with having coins. As long as the exchanges are allowing trades, most people view it as being a good sign of the coin being healthy. As we looked at earlier this is far from being true, but it is what the majority thinks that ends up having the biggest impact on each coin. If they believe something that is entirely false, but enough believe it, a coin will crash. On the other hand, if the majority believe a coin is the best one available (even though it might now be), they can thrive.

Where is the Value?

Crypto currencies are a lot like cash: they have no actual value. What they really have is what we call “perceived value.” If you look at trading charts for the various real life currencies (USD, CAD, etc.) you will notice that they often fluctuate in value, even over a period of a few minutes or seconds. This is because money is not static. It has value because we, as the public, believe it does. Past that there is no real security.

A way to explain this better is to consider the Native Americans. They traded items like pots for food, weapons, etc. Where we use cash as our system of money, theirs was then the items they created. Whether a pot was worth anything or not was up to the public. They could one day decide a pot is worth 5 pounds of food, and the next turn it around and decide it is worth 500 pounds.

The money's value is something we see changing in every day life. As an example, if you keep a spreadsheet showing the costs of your groceries every month, you would see that there is a change in the costs of different items. Gasoline is the same way. You might be able to get gas for $3 a gallon today and it be $4 tomorrow. This increases the cost of living, and therefore shows that the value of a dollar has become worth slightly less (inflation).

When we decide to trade our coins in (whether it be for cash, other coins, items or even services), we are creating our own value for them. But an important thing to consider is that something is only worth what someone is willing to give for it. You may, for example, have a one of a kind painting, but if nobody will purchase it for your asking price, it is not truly “worth” that. Similarly, you may sell something for cheaper than the going rate, but in this case you are not lowering the value (since others are being sold at a higher price). This is a big reason why companies use surveys and such to determine how much to price their new items for: if the consumers are not going to be buying their items, they have a lower value than the asking price and will need to go down in price in order to get people to buy them. This is the same case with coins, in which the value will be fluctuating up and down depending on how much buyers are willing to pay. As people pay more, the value will go up, and as they quit buying the value will go down.

How to Raise Value of Coins

In the last section, we ended by explaining that the value of the coins depends on how much buyers are willing to pay. While this is true, the price can also sometimes be skewed, assuming someone (or a group of people) have enough finances to cover a large buy. In this case, what happens is they purchase a large amount of coins (starting with the cheapest ones available). Since other buyers see that some more expensive ones have been bought, they are more likely to pay a higher price for theirs, up until it hits a point where they no longer find it as an alright value. This can also backfire, due to the number of people that have coins. What happens in this case is that people are constantly listing their coins, so while you may keep buying up the lowest valued ones, more are rolling in. This is somewhat rare in a currency-based transaction, but it is not unheard of.

The other factor of value on coins is the same as with anything else: supply and demand. If more people want to purchase something than are available, the price will go up (essentially meaning that the buyers are paying a premium to ensure they get the coins they want). On the other hand, if people are purchasing less coins than are available, the prices will go down in an attempt to make them irresistible to potential buyers (the lower the price is, the more someone is likely to purchase).

An important thing to keep in mind with all of this is, as said previously, the value of coins will rise and fall. This means that the choice between holding or keeping them is a gamble all on its own, where one choice will always yield a negative while the other will yield a loss.

What If An Exchange Crashes?

There can be many things that lead to an exchange going away. These include being hacked, having server faults without having proper backup, being shut down by legal authorities (since we are still dealing with the “crackdown” and learning what the government views these coins as – currency or not), the owner taking off with all the coins, or many other things. In the case of pretty much any of these, any finances or coins are lost. While the exchange owner may work towards getting people back their missing stuff, there is also a chance that they will not. This is especially true if they no longer have any of it and would be forced to try and reimburse people on their own.

Because of the unknown nature about the future, it is important to play it safe with any exchanges you use. Only transfer funds to the exchange when you are ready to trade it for something, and then be sure to remove them when you are finished. Do not leave any coins or money sitting dormant, or you are just increasing the chances that something will go wrong. Even an hour or two can easily be the difference between getting back everything and getting back nothing. And how much you “made” by doing trading is irrelevant if you are not able to remove any of it!

What some people choose to do is take an amount they use for trading, and as the trades go on, remove some of it. Think of it as being like a bank. If you have hit the FDIC limit (which means only part of your balance is going to be insured), it is a good idea to take out whatever does not make the limit each month. Put that amount aside, and leave the rest there. Similarly, you can do the same with coins. If you have 5 BTC's there and turn it into 7, take 2 of it out and keep doing that. You will make less over the long run, but it still is not as bad as building it up to hundreds and then losing it all. And at least if you have your extra coins stored off the exchange, if it does flop over and die you have some of your initial investment still (if not all of it, plus interest).

Playing it smart is the big key to being successful here.

Exchanges


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