(Exchanges support the digital transactions and buying and selling of crypto assets)
Someone who wants to begin crypto trading can start with digital exchange mediums. If you want to buy cryptocurrencies and other digital assets, you need to register on a crypto exchange to make transactions. Many privately owned crypto exchanges facilitate the trading of cryptocurrencies and other digital assets, including Fiat currency and NFTs.
There are three most common types of exchanges prevalent in digital space, and the most common are Centralized and Decentralized crypto exchanges, each of which has advantages and disadvantages. So let’s take a better understanding of what they are.
What are crypto exchanges?
The sophisticated way to trade cryptocurrencies can be exchange platforms. Cryptocurrency exchanges support the selling and buying of digital currencies with a simple method.
In the market, a variety of crypto exchanges are available that help users buy and sell the most common cryptocurrency like bitcoin, ethereum, Solana, and other popular coins.
- Crypto exchange platforms are intended to support buying, selling, and trading of digital coins.
- Centralized and Decentralized exchange platforms simplify the trading journey.
- Centralized exchanges operate on an order book system.
Centralized Crypto Exchange
A Centralized Crypto Exchange is an intermediary between a buyer and a seller, developing revenue through commission and trading fees. The operating mechanism of crypto exchanges is much similar to the stock exchange, but the difference is that cryptocurrency exchanges deal in digital assets.
Some of the most popular crypto exchanges are Coinbase, Crypto.com, Gemini, Kraken, and KuCoin. These exchanges support buying and selling digital assets at a prevailing price where users can go with spot trading or execute limited orders.
However, because of the presence of an intermediary, one of the main risks of Decentralized exchanges is their high susceptibility to attacks. So Let’s understand the advantages and disadvantages of a Centralized Crypto Exchange.
Advantages of Centralized Exchange
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Reliable
The Centralized exchanges provide an extra level of security and comfort to the users regarding trading and placing transactions. A developed Centralized transaction can offer a high level of protection for the user’s convenience. So, trading on a Centralized exchange secures your financial details by protecting your funds.
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User-Friendly
The Centralized Crypto Exchange provides a user-friendly option to trade in different cryptocurrencies. Peer-to-peer transactions make things a bit complex for beginners, while the users of Centralized exchanges have the authority to check their accounts and balances to make quick transactions.
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Leverage
Another benefit of Centralized Exchange is that it provides certain leverage to make your investment amount bigger by borrowing some funds from the Exchange. It is also called margin trading, which can give you higher returns, but the loss can also get bigger.
Disadvantages of Centralized Exchange
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Risk
A Centralized Exchange always risks losing your hard-earned funds because the Exchange usually holds billions of dollars worth of Bitcoin. An incident already happened where the crypto exchange reported a theft of 850,000 bitcoins, which led to its collapse.
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Custody of Digital Wallets
Almost every crypto exchange keeps the custody of your cryptocurrencies with them. They don’t allow you to have your private keys on another digital wallet. The Centralized Exchange never brings you authority over your funds.
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Transaction Fees
The Centralized Exchange charges more transaction fees than other exchanges as they charge higher prices for convenience and the services they provide. Therefore, the fee amount could increase when the transaction amount gets more extensive.
Decentralized Crypto Exchange
A Decentralized Exchange is a type of Exchange that allows peer-to-peer transactions from your digital wallet by playing the role of intermediary. Some popular Decentralized exchange platforms are Pancakeswap, dYdX, Kyber, Uniswap, etc.
Decentralized exchanges are highly reliable on smart contracts, which offer more security than any Centralized exchange. But the lack of an intermediate third party makes it a tough choice for many investors.
Advantages of Decentralized Exchange
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Custody
The main advantage of Decentralized Exchange is that you don’t need to transfer your digital assets to a third party. So, there is no risk of getting hacked, and it ensures that users can place transactions without worrying about anything. The Decentralized exchanges are highly secured from hacking, fraud, or theft.
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No Formalities
The Decentralized Exchange doesn’t ask to fill out know-your-customer forms, and users can come to the Exchange and create their accounts without any hassles. In addition, since the exchanges don’t ask for censorship, more altcoins are available than Centralized exchanges, which gives users more options to trade in.
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Prevents Market Manipulation
As it allows peer-to-peer Exchange of cryptocurrencies, it prevents market manipulation and protects users from wash and fake trading.
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Privacy
Decentralized exchanges maintain the integrity of your personal details and also do not require much of your personal information, such as KYC details.
Disadvantages of Decentralized Exchange
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Complex Nature
Decentralized Exchanges are complex; if you lose your private keys, your assets can get lost forever and will not recover. Users need to learn everything about the platform before creating an account. At the same time, Centralized Exchange provides a convenient and user-friendly approach.
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Less Liquidity
Users should know that most of the transactions are facilitated by Centralized Exchange, which lacks transactions on Decentralized exchanges. Due to the lack of transactions in Decentralized Exchange, users acquire less liquidity; it can be challenging to find buyers and sellers when trading volume is low.
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No Fiat Payment Options
Decentralized Exchange doesn’t offer Fiat payment options, which is the biggest demerit for users. It doesn’t allow you to buy and sell digital assets with Fiat currency, which is called on and off-ramping. It is an inconvenient option for users who do not hold cryptocurrencies.
FAQs
Q. What is the main crypto exchange?
Ans. There are many exchange platforms available online. But coinbase is considered the best exchange platform that offers more than 200 plus cryptocurrencies.
Q. What is the difference between crypto wallets and crypto exchanges?
Ans. Crypto wallets and crypto exchanges are entirely different things. Crypto exchanges are a marketplace where people buy and sell cryptocurrencies.
Q. What crypto is bigger than Bitcoin?
Ans. Binance is considered one of the biggest crypto exchange platforms.
Closing thoughts
Crypto exchanges are what make an investor’s journey easy, providing them with space to buy and sell various cryptocurrencies. They offer trading space, price discovery, and also free space for traders.
Before the exchanges’ inception, people were only able to acquire digital assets through mining or transactions of online exchanges. Today, many exchanges support easy buying and selling cryptos depending on the level of security and fees.
