Centralized cryptocurrency exchanges enjoy support and acceptance among traders because decentralized exchanges are still in the infancy stage and are not very popular.
A centralized cryptocurrency exchange is an online trading platform which enables traders to purchase or sell cryptocurrencies with fiat (fiat/crypto paring), in addition to buying or selling digital currencies with other digital currencies (crypto/crypto pairing).
The centralized cryptocurrency exchanges enjoy popularity among crypto traders because of various advantages. To know these benefits, first, we need to understand what exactly centralized cryptocurrency exchange is.
It is the most common way to trade cryptocurrencies. In simple words, centralized exchange is an online trading platform that functions as a traditional stock market. The difference here is that a centralized exchange enables traders to purchase or sell cryptocurrencies with fiat (fiat/crypto paring), in addition to buying or selling cryptocurrencies with other cryptocurrencies (crypto/crypto pairing). Thus, the exchange allows you to trade BTC for fiat currency and for other cryptocurrencies, such as litecoin, ethereum etc.
Centralized cryptocurrency exchanges enjoy support and acceptance among traders because decentralized exchanges are still in the infancy stage and are not very popular. It is important to understand the basic difference between centralized and decentralized exchanges. In view of the fact that blockchain technology and cryptocurrencies are known for their decentralized nature as compared to centralized currencies such as the US dollar or the Euro, similarly cryptocurrency exchanges can also be either centralized or decentralized.
The peer-to-peer decentralized exchanges provide a direct connection between the sellers and buyers, thus it eliminates the middleman. A decentralized cryptocurrency exchange (DEX) makes use of smart contracts and atomic swaps that eliminates the use of an escrow service.
To understand the centralized cryptocurrency exchanges better, here we list its key features:
- A centralized cryptocurrency exchange is a formal structure and you have to put trust in someone else that is, a trusted middleman to handle your money. Like in the case of banks, we put our trust in this institution to hold our money, similarly in centralized exchanges traders store their money i.e. tokens or coins on the exchange and thus trust the middleman. This implies that unlike DEX, investors can easily recover their lost password by simply showing a passport or by verifying his or her identification. However, in case of DEX, it becomes impossible to recover lost private keys stored in hardware wallets.
- It is to be remembered that there is no guarantee of safety as centralized exchanges are vulnerable to hacks. The crypto history has witnessed many such events. In this regard, DEXs are much safer because it is very difficult to hack it; however, users themselves might end up locking away their money for ever.
- Every centralized crypto exchange offers crypto/crypto pairing which means, for instance, you may trade 1 BTC for 9 ETH. However, the service of fiat/crypto pairings, for example, trading $900 for 1 ETH, is not available at every exchange. The fiat/crypto pairings are offered by some well-known exchanges like Coinbase, Kraken, Gemini, etc.
- Among various exchanges, there are some with highest volume and crypto pairings. Some of them are:
- GDAX: A sister company of CoinBase, the Global Digital Asset Exchange is amongst the most popular exchanges in the world. Unlike Coinbase, GDAX offers many more options and features. However, this exchange is not suited for beginners as it focuses more on sophisticated and professional traders, offering to trade for crypto/fiat and crypto/crypto pairings. Coinbase, on the other hand, serves retail customers.
- Binance: This HongKong based exchange was launched in 2017 and presently boasts of the highest daily volume than any other exchange. Binance has gained massive traction and popularity in a very short span of time after it had raised funds through an ICO on the Ethereum network.
- Bittrex: This U.S. based exchange is suited for beginners with an easy user interface. The exchange trades the most popular coins like BTC and ETH and holds over 250 trading pairs.
- It is important to note that volume plays an important role for exchanges because more volume means less volatility and market manipulation. For instance, at an exchange’s current price of $13,000, Daniel wants to purchase 1 Bitcoin. Now, he may easily undertake this deal if the volume on the site is extremely high. However, in the case of low volume on an exchange, he may need to hold all sell offers for buying one BTC, which implies buying the higher sell offer will consequently shoot up the price of Bitcoin on that particular exchange.
- In order to authenticate the account, a minimum verification is required by exchanges all around the globe. Users are asked for basic verification which usually comprises of a picture of the user’s passport/ID, and 2 Factor Authentication (2FA). However, the accounts that are opened without an identity check have very small withdrawal/deposit limits.
To summarize, centralized crypto exchanges enjoy the benefit of legality and regulation, thus they are held accountable in case something goes wrong. Moreover, these are easy to use and have more liquidity. However, on the negative side, funds are in control of the exchange and there is lack of anonymity. Further, exchanges are not immune to hacks.
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