Is it possible to trade the traditional physical US Dollar for a digital currency? What is the possibility of withdrawing a cryptocurrency the same way fiat currency is actually withdrawn from the bank? How do you exchange your cryptocurrency to fiat money and vice versa? The blockchain itself is underpinned with decentralized spirit, so should the exchanges also follow that path?
Rest assured, the answers to these questions are within your reach. A cryptocurrency exchange has made it possible to exchange and convert your fiat money into a digital currency and vice versa. However, is that what an exchange is all about? Then, how can it help in exchanging currency from one form to another?
You must have heard about Bitcoin (BTC) and other altcoins and, probably, you want to get a feel of these digital currencies. Are they worth investing? For you to trade your fiat currency for the cryptocurrency, you need a reliable exchange. A cryptocurrency exchange has become the entry point for investors who want to enter into the crypto-market.
What is an Exchange?
An exchange is an online web-based platform where investors can exchange (convert) their raw physical cash into cryptocurrencies and vice versa. The majority of the exchanges out there focus their attention on offering services that help investors exchange their cryptocurrency from one form to another. For instance, one exchange could be Bitcoin (BTC) to another cryptocurrency such as Ethereum (ETH) or Litecoin (LTC).
These exchanges allow investors to trade cryptocurrencies for conventional fiat money or other different forms of cryptocurrencies. There are different types of exchanges and not all the exchanges provide the same services. Therefore, it’s important you know these differences, advantages, and disadvantages. Let’s proceed!
Types of Exchanges
At the moment, there are three types of exchanges:
- Centralized (CEX)
- Decentralized (DEX)
- Hybrid
1. Centralized Exchanges (CEX)
Centralized exchanges are professional platforms where buyers and sellers come together to transact business. The exchange acts as an intermediary, collecting trading fees in exchange for the services they provide. They monitor trades and also check the records to ensure they work in accordance with the local law.
Most importantly, centralized exchanges provide the opportunity for traders to have an interface that can link them to real business and the cryptocurrency trading platforms.
Among the various types of exchanges, centralized exchanges have become the first entry point for new traders who are really interested in cryptocurrency trading. Unfortunately, due to being centralized, these exchanges can suffer catastrophic damage from hackers. Some examples of centralized exchanges are Binance, Kucoin, and GDAX.
Advantages of Centralized Exchanges
- Centralized exchanges have a better liquidity rate than other exchanges. An exchange cannot work well without good liquidity because the differences between trades need to be properly minimized. This action makes the most popular exchanges suitable platforms to transact high volumes of trades.
- They have the required capital for updating and developing their trading platform to suit the needs of their clients. This makes centralized exchanges easy to use.
- Centralized exchanges are friendlier to government regulations than the other types of exchanges. They have already started implementing the government’s anti-money laundry acts (AML), as well as Know Your Customer (KYC) user requirements.
- They enable faster transactions owing to their optimized trading platform.
Disadvantages of Centralized Exchanges
- Centralized exchanges do charge very expensive listing fees. Thus, this has allowed hackers to siphon large sums of money from innocent users.
- Users that want permission to trade on their platform must subject themselves to a thorough verification process by submitting their identification documents. This makes such individuals vulnerable to identity issues.
- Centralized exchanges have control over investor’s funds.
2. Decentralized Exchanges (DEX)
Decentralized exchanges work by matching people who want to buy and sell cryptocurrencies. That said, decentralized exchanges do not need the assistance of middlemen or intermediaries to transact business. In fact, decentralized exchanges support peer-to-peer trades.
As a result, trading at decentralized exchanges allows you to store your own tokens as you keep your private keys. In essence, decentralized exchanges focus their attention on supporting a specific blockchain protocol such as the WAVES Network. Some of the examples of decentralized exchanges are IDEX, Waves DEX, and Stellar DEX.
Advantages of Decentralized Exchanges
Decentralized exchanges have the following advantages:
- The truth about decentralized exchanges is that you do not need a middleman to use them. Terminating the middleman in the process will reduce the transaction costs and trading fees significantly.
- Decentralized exchanges execute trades on a peer-to-peer basis and these exchanges allow the user the autonomy to control their funds.
- A transaction on decentralized exchanges is secure, private, anonymous, and transparent.
Disadvantages of Decentralized Exchanges
- Most of the transactions happening in decentralized exchanges run very slowly giving room for hackers to thrive.
- You will lose all your money if hackers tamper with your account.
- The decentralized exchanges are not easy to use by beginners as they are friendlier to experienced traders.
- They do not have KYC (Know Your Customer) identity verification.
3. Hybrid Exchanges
These exchanges are likely to be the next generation cryptocurrency exchange. Unsurprisingly, their aim is to combine the advantages from both centralized and decentralized exchanges. More so, hybrid exchanges want to provide the liquidity of CEX with the anonymity of DEX. Hybrid is probably the cryptocurrency exchange of the future.
Qurrex is the first ever hybrid exchange which came into being in 2018. Created by a team filled with years of Forex experience, Qurrex remains a shining example of a centralized and decentralized mix.
Conclusion
Exchanges play a crucial role in bringing more investors into the cryptocurrency market. The more good exchanges spring forth, the more people will adopt this innovative new financial tool and the revolutionary technology backing it up.
Most importantly, exchanges help to redirect value from conventional platforms of value to digital asset trading. Then, users can trade or invest in different projects no matter their location in the world. Nonetheless, you must invest or trade wisely.
Risk Disclosure
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.
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