Cryptocurrency exchanges enable the trade of cryptocurrencies for other assets, such as fiat and digital currencies. Similar to how stock exchanges facilitate the trading of stocks, cryptocurrency exchanges do the same.
Centralized and Decentralized cryptocurrencies have a tough fight-off between them as users are diving to one another. On the other hand, given that cryptocurrencies are relatively new assets, cryptocurrency exchanges are a more recent notion. The first cryptocurrency exchanges were established in 2010, when Gavin Anderson, a developer of Bitcoin, established a website known as a “faucet” to give away free bitcoin. Finally, in the same year that Mt. Gox emerged, the well-known exchange Bitcoin Market was also introduced.
Many investors have recently found that cryptocurrencies make intriguing asset classes because of the fantastic returns they may generate. Cryptocurrency exchanges are growing increasingly active in terms of investor and trader activity, as evidenced by the volumes being traded on them, resulting from cryptocurrency making up a section of investor portfolios.
Centralized Cryptocurrency Exchanges
Centralized cryptocurrency exchanges serve as a middleman between a buyer and a seller, as the name suggests. Virtually all cryptocurrency transactions pass through centralized exchanges because they provide greater dependability. Some centralized cryptocurrency exchanges include Coinbase, GDAX, Kraken, and Gemini.
User-friendly: Centralized cryptocurrency exchanges offer user-friendly user interfaces and simple-to-use platforms, including websites and apps, which make it comfortable to transact in cryptocurrencies anytime. This is in contrast to peer-to-peer transactions and cryptocurrency wallets, which can be complicated and time-consuming.
Reliability: When it comes to cryptocurrencies, investors and traders have a lot to worry about because they are already dealing with a lot more uncertainty than they would in the case of regular bonds and equities. Centralized cryptocurrency exchanges have an advantage in this situation because they add a degree of security and dependability to transactions and trading.
Hacking Risk: Since businesses run centralised exchanges in charge of their clients’ holdings, they are extremely vulnerable to cybersecurity risk. One of the biggest and most reputable centralised cryptocurrency exchanges, Mt. Gox, experienced a significant attack in 2014. 850,000 bitcoins, or more than $460 million, in customer funds, were taken as a result of the incident. Following the hack, Mt. Gox declared bankruptcy.
Transaction Costs: Centralized cryptocurrency exchanges impose reasonable fees for their services. Unlike equity transactions, bitcoin transactions are not subject to taxation, yet the fees charged by centralised exchanges nonetheless represent a significant financial expense. For instance, Binance levies a transaction fee between 0.012% and 0.1%.
Decentralized Cryptocurrency Exchanges
Users can conduct peer-to-peer transactions on decentralised cryptocurrency exchanges without using a middleman. Decentralized exchanges do not make it easy to trade fiat money for cryptocurrency.
Decentralized cryptocurrency exchanges include Uniswap (V2), Tokenlon, 0x Protocol, and Venus.
Anonymity: Decentralized exchanges are completely private and anonymous, unlike centralised cryptocurrency exchanges that need users to fill out KYC (know-your-customer) information when opening an account.
No hacker danger: Since users of decentralised exchanges do not need to transmit their funds to a third party that might be compromised, they offer a good alternative for investors concerned about hacking risk.
Market Manipulation Prevention: Participants on crypto exchanges are safe from market manipulation because peer-to-peer communication is the norm.
Lack of fiat payments: One of the greatest drawbacks of decentralised exchanges is that fiat currencies cannot be exchanged for virtual ones. Decentralized exchanges will make it difficult for customers to conduct transactions if they do not already own cryptocurrencies or if they want to be able to liquidate them easily.
Complexity: Centralized exchanges offer user-friendly features because they offer their platforms for transactions. Decentralized exchanges, on the other hand, do not offer ways to restore passwords if users lose their crypto wallet passwords and require them to become familiar with a comparatively more complicated process.
Liquidity: Since only a very small percentage of users (only a little over 1%), decentralised exchanges are extremely illiquid and occasionally present liquidity concerns. This prevents a user from trading smoothly in emergencies and could lead to greater spreads than when using centralised exchanges.
Top 4 Cryptocurrency Exchanges
Based on the average daily trading volumes, Binance is the largest cryptocurrency exchange. Compared to other widely used exchanges, it offers hundreds of different currencies for trading and has significantly lower fees. Furthermore, it offers sophisticated charting techniques without requiring an upgrade from the user.
Yet, cryptocurrency fraud has been mostly avoided thanks to Coinbase, which also offers a very reliable trading platform. Additionally, a Pro edition is available with much higher technological features and lower transaction fees. 64 different cryptocurrency transactions are permitted on Coinbase.
Cash App is the best cryptocurrency exchange for novices since it offers a very straightforward user interface, a wide range of essential functions, and the ability to invest in stock. However, Cash App only supports trading in bitcoin; it does not support other altcoins.
The top decentralised cryptocurrency exchange is Bisq. With more than 25 different payment methods, it offers a fully anonymous, non-KYC platform. Although it adheres to the decentralised nature of cryptocurrencies, there are issues with liquidity and speed.
Compared to other asset classes like equity, commodities, bonds, currencies, etc., cryptocurrencies are still in their infancy. Cryptocurrencies are very volatile due to the immaturity brought on by them being newer asset classes.
Nevertheless, the high levels of liquidity and projected revolutionary potential of cryptocurrencies have greatly increased market involvement over the last several years. Cryptocurrencies are still mostly uncharted territory, and many people—even those who actively participate—do not understand their principles thoroughly.
Since bitcoins are expected to become more well-known and more widely understood over time, there should be a gradual decline in volatility. As seen by the recent increase in the number of cryptocurrencies exchanged on different exchanges, crypto exchanges play a significant role in the maturation of cryptocurrencies.