An exchange rate is a self-explanatory term that has its roots in traditional financial and stock markets. In cryptocurrency terms, it describes how many tokens you can get based on how many tokens you own and want to exchange for another cryptocurrency. It essentially compares the value of one cryptocurrency to the value (or price) of another, as crypto assets rarely trade at the same price.
For example, if you want to trade ETH for XRP right now, you will get 5,257 XRP coins for 1 ETH (so the exchange rate would be 1:5,257 in this case).
There are two types of exchange rate mechanisms in crypto: fixed and floating. Most exchanges use a single exchange rate while a few allow the user to choose between the two.
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As you might already guess, each rate offers different benefits, and today we’re going into great detail so you know when and why it’s better to use one over another. ChangeNOW is a popular crypto exchange that supports both exchange rates and we will use it as an example throughout the text.
What is a fixed exchange rate, exactly?
A fixed exchange rate (also known as a pegged exchange rate) is one that stays the same (it’s basically locked) regardless of what happens in the crypto market during the transaction processing time.
This means that exchanging one crypto for another at a fixed rate with ChangeNOW can go a long way in avoiding the volatility risks that regularly occur when trading. Thus, fixed exchange rates take the guesswork out of trading and produce predictable results. Obviously, the main benefit of a fixed rate is that it acts as a hedge against the sudden price swings and drops that happen in crypto all the time.
Keep in mind that you don’t receive any extra coins if you stick to the fixed exchange rate, even if the rate changes in the meantime. It often happens that the market goes into an up/down trend during the trade, but it would have nothing to do with you and the amount of crypto you would get would remain the same.
If you want to trade cryptos on the ChangeNOW platform (it doesn’t matter if you access it from your computer or via a mobile application) and you choose a fixed rate, you will know the rate in advance since it will be displayed to you at the beginning of the exchange process.
By choosing the fixed exchange rate, you have 20 minutes to make a deposit and redeem the funds. ChangeNOW guarantees that the rate will remain as it is during this period and you can be assured that you will receive the number of coins initially indicated.
The biggest disadvantage of the fixed exchange rate is that it usually involves higher commission fees, so you would pay a bit more to only play it safe.
What is a floating exchange rate?
A floating or flexible exchange rate (sometimes also called a conventional or standard exchange rate) is a self-correcting rate that is determined by free market forces – supply and demand and several other factors. Simply put, if the value of a cryptocurrency increases and the supply decreases, the exchange rate will follow and increase. Conversely, if the value of a cryptocurrency drops and the circulating supply increases, the exchange rate will drop.
A floating exchange rate changes in minutes, sometimes even seconds (hence the name floating). If you decide to opt for the flexible exchange rate, keep in mind that the rate displayed at the start of the transaction can change drastically and you may get more or less than you thought.
When you trade one crypto for another with ChangeNOW and opt for a flexible rate, the platform will give you an estimate and offer you the absolute best exchange rate at that time. If all goes well and market volatility turns in your favor, you may end up receiving a much higher amount of crypto than originally displayed.
In fact, judging by the reviews, ChangeNOW users usually get the exact amount of crypto as stated (or even more on some occasions). While there are times when volatility hits (which is totally out of any crypto exchange’s control), it’s still good to know that, most of the time, you know what to expect.
It is worth mentioning that transaction fees with floating exchange rates are usually much lower than the fees you have to pay when you opt for the fixed rate.
Once you have deposited the money and chosen your desired flexible exchange rate, the exchange service will display the amount of crypto you would get at the current exchange rate. However, the final amount of crypto in your wallet will likely be different.
A floating exchange rate goes up and down all the time, and compared to a fixed exchange rate, it is much more uncertain. That’s why you may also get less than you thought – you never know. One thing is certain: the floating exchange rate is not for the faint-hearted.
Fixed vs floating exchange rate
There is no right or wrong answer to the question of which exchange rate is better, fixed or floating. Either option may be preferable in certain circumstances. To be successful in trading, you must be able to calculate the risks and potential rewards and choose the rate accordingly.
To sum up, with the fixed exchange rate, you know that you will definitely get the same amount of crypto that was displayed at the start of the transaction. Although the fixed exchange rate is a guaranteed rate, most of the time it is less favorable and you will not be able to get as many tokens as possible.
With the floating exchange rate, there is some guesswork, as there is absolutely no certainty as to how many tokens will be delivered to your wallet after the transaction has been processed.
However, if you have the luxury of being able to take risks, you might actually end up with a decent amount of coins in your wallet. It is indeed a good thing that ChangeNOW allows users to make a choice between fixed and floating rates according to their preferences and risk tolerance every time before making a trade.
This article does not necessarily reflect the views of the editors or management of EconoTimes
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Fixed And Floating Exchange Rates From ExchangeNOW – Tech Tribune France
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