Cryptocurrency Exchanges

Cryptocurrency Exchanges

The cryptocurrency market is heating up, whether it’s a major exchange hack or the introduction of new Bitcoin ETFs. As you all know, we are inching closer and closer to mass adoption every day. It’s just a matter of when – will it be this year? Next year? Who knows!

In this article we will explain the difference between centralized and decentralized cryptocurrency exchanges, to help you decide which type is best for your trading needs. To provide more context.

Centralized vs. decentralized exchanges

At a centralized exchange, you trust a 3rd party to monitor transactions, secure assets and keep your private key. Trades are not directly made on the blockchain itself, but in specific pairs on an exchange of choice. This is why transactional costs on exchanges vary from the corresponding network fee (or gas fee). Buying Ethereum, for example, you might experience a network fee of about $15. Which, if you are a small investor, might be a dealbreaker as the ROI is much less. At a centralized exchange, those fees are minimized to as little as a few cents per trade; which, of course, sounds more interesting.

Liquidity

At a decentralized exchange the community, the people who use it, provide liquidity to a non-alterable smart contract (which makes sure fraud is omitted). As a result, the decentralized exchange has the token “In-store” and others can buy and sell supported pairs by using the liquidity pools. But since it’s community-driven, pools can also dry up or be suspected to be a rug-pull vulnerability. Both exchanges provide liquidity pools, support arbitrage-trading (exchange-to-exchange-trading), and support market makers for a more stable price per token across exchanges. On top of that, a centralized exchange is heavily invested (and thus backed by a lot of “real” money”). By default, it deploys communication, different strategies, and innovations comparable to tech businesses.

Who owns the assets and securing your investment.

When trading on an exchange the coin is, in a black swan event, owned by the exchange and possibly not retrievable. This is not explicitly true but “no keys, no coins” is considered a rule of thumb in the crypto-community. This is because exchanges stores your private key; which is mandatory for sending transactions. If this sounds scary, consider big exchanges with millions of IT-budget might be more successful securing your assets than you might be able to do yourself. So always look for the most trustable exchanges.

Becryptive recommends Coinbase pro and Binance. Those are the world-leading exchanges with proven track records and are also supported by our automated trading bot!

When choosing Defi other risks exist such as loss, damage, or a stolen hardware wallet or private keys. This is also true in the case of a paper wallet, which is just a file containing your private key. You are also susceptible to the so-called “5-dollar-wrench-attack” – which implies someone might beat you with a 5-dollar wrench until you provide them with your wallet or private keys. Some hardware wallets(Trezor, Nano, Ellipal, and KeyKeep) have features to prevent this by installing hidden wallets. Then, hopefully, when an unfortunate event occurs, only the small wallet(s) will be cleared out. Last but not least; a hardware wallet is not for everyone. It requires a lot of research to find the right one, a lot of them are technically complicated and it still needs a lot of thought about how it’s secured. So to help you we have the following rules of thumb:

• For (automated) traders and people new crypto, an exchange is ideal.
• For holders, both exchanges and hardware wallets are great. This depends on the network fee and if the coin is supported by your device.
• Paper wallets should (always) be avoided!

Know-your-customer (KYC)

In most countries, financial institutions asks for your details, including a copy of your national ID, full name, date of birth, and address. Those policies exist to prevent money laundering, terrorism, and online scamming.