Cryptocurrency exchanges convert a cryptocurrency or a country’s currency (dollars, Euros, pounds, etc.) to cryptocurrency (Bitcoin, Ethereum, etc.). Popular centralized exchanges that fall into this category are Coinbase, Binance, Kucoin, Kraken, and Gemini. Popular Decentralized Exchanges (DEX) include Uniswap, Trader Joe, Depo.io, SushiSwap, Quickswap and Balancer.
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What is a cryptocurrency exchange? The simple answer is that these exchanges make minting, mining, buying, selling, and trading crypto possible. Crypto is used on these exchanges as currency, they are bought and sold as investments, and you can participate in mining/minting crypto for rewards via these exchanges.
Centralized Versus Decentralized Exchanges
There are centralized crypto exchanges and decentralized cryptocurrency exchanges. There are also hybrids.
Decentralized operations have the advantage of offering the ability to use crypto without the need for a third party, but the drawback for some is that they find decentralized options may not allow the use of fiat currency or real-world money.
Examples of decentralized exchanges include Airswap, Blocknet, and Barterdex.
Centralized exchanges rely on the “human factor” in return they offer more stability and reliability. That is not a stamp of approval for centralized exchanges, but it does give some perspective on why some choose a centralized option.
Centralized exchanges include Coinbase, Kraken, and Gemini.
Centralized exchanges offer beginner investors a familiar, friendly way of trading and investing in cryptocurrencies.
That’s as opposed to using crypto wallets and peer-to-peer transactions, which can be complex, users of centralized exchanges can log into their accounts, view their account balances, and make transactions through applications and websites.
Why Use A Centralized Exchange Like Coinbase?
Beginners in the crypto world may do well to start out using a centralized exchange to buy or sell Bitcoin, Ethereum, etc. The ability to get assistance (even if it is just through the exchanges knowledge library of articles related to investing in cryptocurrency, etc.) or additional information from the exchange can be quite useful to the new investor.
A decentralized exchange may assume new users have a specific level of expertise in crypto that may not be true of the new investor.
Decentralized exchanges have a higher risk where hacking is concerned. If you aren’t sure how to protect yourself and your investments in the crypto world yet, a centralized exchange may be the best way to learn how to invest while lowering your overall risk in this area.
One advantage of centralization is liquidity–if you have a difficult time finding a buyer for your crypto using a peer-to-peer or decentralized exchange you may start to understand why some prefer the centralized versions.
It can be easier to find a buyer when your exchange is centralized and even with transaction fees levied by that third party, the ability to sell more freely can be a major asset.
Why Use A Decentralized Exchange?
Some prefer to eliminate the third parties in favor of a peer-to-peer transaction. This is sometimes because the buyer or seller prefers the anonymity of cutting out the middleman.
Other times it may be over an objection to the transaction fees charged by third-party platforms. If you are trading large volumes of tokens or coins such fees could become prohibitive (at least in terms of your profit margin).
Peer-to-peer transactions are also ways to sidestep market manipulators, pump-and-dumpers, and scams. But as mentioned above, decentralized operations don’t allow trading in real world money. They can be more of a hassle to use because of this.
Crypto Exchanges Versus Crypto Wallets
The exchange you trade crypto at is not a bank in the legal sense, but these exchanges can perform bank-like functions including offering crypto investments and even crypto loans.
We don’t mention this to imply that you should treat your Bitcoin or Ethereum exchange like your bank (that is becoming more possible over time, but it’s early days), but rather to use the metaphor to explain the difference between an exchange and a crypto wallet.
A crypto wallet is where you store the private and public keys that give you access to your coins. The wallet can be hardware, software, or even pen and paper. If you lose the private keys to your crypto, you lose access to it. The wallet is the storage unit.
A crypto exchange is NOT a crypto wallet but you may be able to take advantage of a crypto wallet option offered by an exchange. The wallet is where you keep your paper money in the real world, the same is true in crypto. The exchange is the “bank” should you choose to use one.
Some crypto wallets, like some crypto exchanges, favor certain types of currency. You may find that one size does not fit all when it is time to invest in a wallet. You can store your crypto using your own wallet (most secure) or choose an option an exchange might provide (less secure). Why do we say the exchange is less secure?
Given that there are no regulatory controls that govern them, the basic risk aside from hacking, theft, and fraud is that the exchange could simply close up shop without warning at any time. What happens to your cryptocurrency when that occurs is up to the good graces of the people running the exchange. Will they refund your crypto or run away with it?
Questions To Ask When Considering A Crypto Exchange
If you are considering an exchange, you’ll want to know how much the fees are for conducting your business there.
But you will also want to know how much liquidity exists–it does no good to be charged lower transaction fees when you can’t find another person to do a transaction WITH. Liquidity is a very important aspect when it’s time to decide what exchange to use. Or to use one at all.
The more trading volume or liquidity an exchange has, the more likely you are to find buyers or sellers you can work with.
You should also explore how long the exchange you want to join has been doing business. An older, more experienced company has some hypothetical advantages to a newer one that might not have been tested by the adversity in the marketplace over time. That can be an important thing to consider when trying to find the most secure exchange to do business with.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.