Crypto Exchanges allow you to trade cryptocurrencies for fiat and digital currencies. The cryptocurrency exchanges are essentially intermediaries between buyers and sellers and make money by commissions and transaction fees.
Common cryptocurrency exchanges allow you to exchange $100 for bitcoin equivalent in value and vice versa. The same applies to bitcoin of equivalent value. It can be exchanged for Ethereum worth the same amount. This same principle can be applied to other assets depending on the exchange.
Centralized vs. decentralized cryptocurrency exchanges
Centralized cryptocurrency exchanges serve as a third party between buyers and sellers. Centralized exchanges are more reliable because they are controlled and operated by a company. Centralized exchanges account for approximately 99% of all crypto transactions.
Users can execute peer-to–peer transactions using decentralized cryptocurrency exchanges (DEX). Some users prefer decentralized exchanges because they avoid some of the problems associated with centralized ones.
Decentralized exchanges don’t allow for the trading of fiat currencies in order to trade cryptocurrencies.
The advantages of centralized cryptocurrency exchanges
Investors new to cryptocurrency trading and investing can use centralized exchanges. Instead of using cryptocurrency wallets or peer-to-peer transaction, which can be complicated, users can log in to their accounts and view their account balances. They can also make transactions through websites and applications.
Centralized exchanges provide extra security and reliability for trading and transactions. Centralized exchanges provide greater comfort by facilitating transactions through a centralized platform.
The disadvantages of centralized cryptocurrency exchanges
1. Hacking risk
Companies are responsible for managing the customer holdings in centralized exchanges. Large exchanges often hold bitcoin worth billions of dollars, which makes them easy targets for hackers and theft.
Mt.Gox is an example of such an incident. It was once the largest cryptocurrency exchange in the world, but it reported that 850,000 bitcoins had been stolen, leading to its suspension.
2. Transaction fees
Contrary to peer-to-peer transactions and centralized exchanges, they often charge high transaction fees for their convenience and services. This can be particularly true when trading large quantities.
Benefits of decentralized cryptocurrency exchanges
1. Hacking Risk Mitigation
Decentralized exchanges don’t require users to transfer assets to third parties. Users are protected from theft and hacking, and there is no chance that a company or organization could be hacked.
2. Market manipulation prevention
Decentralized exchanges allow peer-to-peer trading of cryptocurrency. This prevents market manipulation and protects users from fake trading.
Decentralized exchanges don’t require customers to complete know-your-customer forms (KYC), which allows privacy and anonymity for users.
The disadvantages of decentralized cryptocurrency exchanges
Decentralized exchange users must remember their keys and passwords for their crypto wallets or they will lose their assets forever. They require that the user learn the platform and the process. Central exchanges offer a simpler and more user-friendly process.
2. Insufficient fiat payments
Users who do not have cryptocurrencies are not able to trade fiat currencies on decentralized exchanges.
3. Liquidity problems
Centralized exchanges facilitate around 99% of all crypto transactions. This means that they are responsible for the bulk of the trading volume. Decentralized exchanges are often lacking liquidity due to low trading volumes. It can be difficult for buyers and sellers to find buyers and sells on decentralized exchanges.