Those who use the Internet on a daily basis for various purposes, such as work, entertainment, and more, will agree to the fact that not a day passes by when they don’t come to know about the latest news or trend regarding cryptocurrency. Ever since it was launched in the year 2009, it has fascinated a large number of people all over the globe.
However, due to the continuous speculations, rumors, and false information being spread about digital currencies, a lot of people feel reluctant to enter the crypto market. Despite being interested and curious, they refrain from investing in cryptocurrency.
As a result, not many people educate themselves regarding different aspects and details related to digital currencies. Whether it’s methods of investing or fees charged for making transactions, several topics are just new for people as they don’t actively participate in the industry of cryptocurrency. A cryptocurrency exchange is also one of these topics.
What Exactly is a Cryptocurrency Exchange?
Cryptocurrency exchanges are platforms on which people can buy and sell various types of digital currencies. You can buy cryptocurrencies in exchange for money paid via a debit card, credit card, or Internet banking. In order to start investing or trading in cryptocurrencies, you need to complete the registration process on the cryptocurrency exchange of your choice.
Worldwide, there are around six hundred (600) cryptocurrency exchanges or digital currency exchanges. Some of these exchanges allow users to exchange one digital currency for another. Exchanges earn revenue by charging different kinds of transaction fees, such as trading fees, withdrawal fees, etc.
You should look for features like security level, accessibility, availability of digital coins, educational content, and user-friendly interface while choosing a cryptocurrency exchange. But first, you need to understand that cryptocurrency exchanges belong to three different categories which are centralized cryptocurrency exchanges, decentralized cryptocurrency exchanges, and hybrid cryptocurrency exchanges.
Different Types of Cryptocurrency Exchanges Explained
In this section, we have explained the aforementioned three types of digital currency exchanges in short. When you decide to start investing in cryptocurrencies, you should equip yourself with knowledge about exchanges. But if you don’t want to go for crypto exchange and instead choose a CFD trading platform, you can opt for Bitcoin Prime. The term CFD stands for Contract for Differences, which means trading carried out by predicting the movement in the price of digital assets. Bitcoin Prime is a trustworthy CFD trading platform.
- Centralized Cryptocurrency Exchanges
Centralized cryptocurrency exchanges, also known as CEXs, can be compared with stock exchanges used in the stock market. They are the most common and traditional type of digital currency exchange. As the name suggests, all the transactions are centralized.
In simple words, the exchange acts as a central agency or middle man to facilitate transactions amongst buyers and sellers of cryptocurrencies. The company that owns and runs the exchange handles the money and cryptocurrency of users.
Some centralized exchanges give only one option to users – trading cryptocurrency for a fiat currency (for example, the UK Pound Sterling or the US Dollar). Others give two options to users – 1) trading cryptocurrency for fiat currency and 2) trading one cryptocurrency for another cryptocurrency.
In order to start trading in digital currencies on a centralized exchange, you need to create an account by providing some basic details. Then, you need to deposit your money in the exchange (like you would do in a bank). Depending on the cryptocurrencies available for trading on the exchange and the current market prices of those cryptocurrencies, you will place an order.
If you place a buying order, the exchange will find you a seller, and if you place a selling order, the exchange will find you a buyer. As centralized exchanges are quite common, the liquidity and trade volumes are generally high on them. These exchanges are also easy to understand and use. They provide good customer support.
In the case of a few centralized digital currency exchanges, you will also get services like staking. However, centralized exchanges have drawbacks as well. The major drawback is the risk of hacking. The users don’t become the owners of the private keys, and so, they can be hacked easily.
- Decentralized Cryptocurrency Exchanges
Decentralized cryptocurrency exchanges, also known as DEXs, are completely opposite of centralized cryptocurrency exchanges (CEXs). No company acts as a middle man or central agency. Hence, no one handles the money or digital currencies of users.
So, basically, decentralized exchanges can be compared to a service platform where buyers and sellers of digital currencies carry out transactions directly with one another. Unlike centralized exchanges, decentralized exchanges have low liquidity and low trade volumes. The reason behind this is that decentralized cryptocurrency exchanges are not so common or popular currently.
Moreover, the speed, user interface (UI), user experience (UX) of a decentralized exchange or DEX are not good. Decentralized exchanges don’t even offer customer support. But the benefit of using decentralized exchanges is that they are difficult to hack.
- Hybrid Cryptocurrency Exchanges
As the name suggests, a hybrid cryptocurrency exchange is a hybrid between a centralized and decentralized cryptocurrency exchange. Hybrid digital currency exchanges have been built to leverage the benefits of both centralized and decentralized exchanges alongside removing the drawbacks associated with both of them.
Hybrid exchanges provide high liquidity, large trade volumes, fast transaction speed, just like centralized exchanges. They are also simple and comfortable to use. But their security level is on par with decentralized exchanges. The users become the owners of the private keys. Hybrid cryptocurrency exchanges are believed to become widely popular in the future as they offer the best of both worlds.
Now that you have become familiar with different types of digital currency exchanges, you can choose one that suits your needs. Once you select the type or category, you can compare several cryptocurrency exchanges available in that particular category. You can keep in mind the necessary factors for the purpose of comparison. Then, you can choose the exchange that meets various criteria.
Along with learning about cryptocurrency exchanges, it’s also important to learn about government rules and regulations, taxation policies, and other topics related to digital currencies.