Cryptocurrency exchanges are basically online markets where you can buy and sell cryptocurrencies in exchange for fiat currency or other cryptos. In most cases, the Exchange works as an intermediary that provides the trader with a wealth of benefits. But in other cases, Exchanges are just decentralized tools.
This range of benefits is precisely what each cryptocurrency merchant should explore to know which best suits their needs:
- Trade Security.
- Obtain the best offer on the market, both for purchase and sale.
- Wide possibilities of conversion with other assets. Can users convert between cryptos, fiduciaries, and even valuable assets such as gold?
- Dispute options in case of fraud, this benefit applies especially to the centralized Peer to Peer (P2P) and OTC (Over-The-Counter) exchanges.
- Reimbursement opportunities in the event of fraud (proven), this benefit applies especially in the centralized P2P and OTC exchanges.
- Efficient and time-saving trading experience.
- Low commissions for conversion compared to informal traders.
- Earnings from saving cryptocurrencies in the wallets of said Exchange.
- Friendly, professional, or simple interface depending on the needs of traders.
- Leave the security of your cryptocurrencies in the hands of third parties.
Click to find out how to avoid Bitcoin investment scams and Ponzi schemes.
As we can see how varied Exchanges are, their capacities and financial possibilities can also be, which is why to understand it better, we must break down the types and modalities of Exchanges that exist in the crypto-market.
Different Types of Crypto Exchanges
Centralized Exchanges (CEX):
They are all those online cryptocurrency exchange places that are controlled by a private and for-profit financial company. This company controls all the Exchange’s financial operations, which means that it is responsible for the funds and transactions that are executed by its users.
It is important to add that these Exchanges usually comply with the KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. This means that they are platforms that do not provide absolute privacy to their customers. This can be corroborated by the fact that the user must disclose their identity to participate in it.
Examples of these platforms are Remitano, Binance, Kraken, Coinbase, and Bitfinex.
Decentralized Exchange (DEX):
They are all those online cryptocurrency exchanges that are not controlled by any company. They are autonomous and independent, like the decentralized cryptocurrencies of the crypto-market. All this is possible because of blockchain technology (distributed ledger).
It is important to note that a Decentralized Exchange DEX does not retain funds, location, or customer information and only serves as a routing and matching layer to transact purchase and sale orders.
Among the most popular decentralized exchanges are WavesDex, Bancor Protocol, Kyber Network, EtherDelta, AirSwap.
It is a merger between the two models of Exchanges listed above. The Centralized Exchange and Decentralized Exchange features are integrated to unify the best of both because each has its advantages and disadvantages.
In short, Hybrid Exchanges seek to provide the functionality and liquidity of a CEX with the privacy and security of a DEX. Many believe that these exchanges are the real future of the cryptocurrency trading experience.
The first hybrid exchange was Qurrex, which launched in 2018. Other later examples are Eidoo and Stoxum.
They are online exchanges that allow users to trade between pairs of cryptocurrencies. The unique feature of this exchange model over others is that the crypto-market prices govern the trade of crypto-assets in real-time. That is, there is no room for speculation.
Most of these are usually centralized and regulated platforms, so they generally comply with the KYC (Know Your Customer) and AML (Anti-Money Laundering) standards. This also implies that these platforms do not promote the confidentiality of personal data, since the user must disclose their identity to participate in it.
It is important to note that Traditional Exchanges normally charge for their services and establish certain capital limitations to participate in their platforms. These conditions and amounts can be as diverse as Exchanges are in the crypto-market.
Examples of this exchange model are Binance, Kraken, Coinbase, Bitfinex, HiBTC, etc.
This service acts similarly to Traditional Exchange. This is basically because it also works with users’ set rates to buy or sell crypto-assets, plus a small commission for each transaction.
But its main characteristic of these websites is that they are mainly focused on cryptocurrencies. Perhaps brokers are the favorite option for new users due to the simplicity of exchanging cryptocurrencies. A clear example of this service would be Coinbase (the largest Bitcoin Broker worldwide, available in more than 30 countries).
The funds are professionally managed crypto-assets, which allow the purchase of currencies through the fund in which you wish to invest.
The advantage of this method is that it avoids the user having to store the cryptocurrencies he buys or sells; instead, he acquires a fraction of the crypto-asset fund in which he invested. After the investment, the account manager carries out trading tasks, and investors can cash out their profits when appropriate.
Grayscale is a typical example of cryptocurrency funds.
Exchange OTC (Over-The-Counter):
OTC platforms are another modality to trade cryptocurrencies, especially for large volume trades.
These cryptocurrency platforms bear a strong resemblance to traditional OTC platforms where small and large companies trade commodities, stocks, and derivatives. That is, they offer point-to-point exchanges between buyers and sellers. But here, only cryptocurrencies are traded. Often in the crypto-market OTC, the user-clients who trade are cryptocurrency miners or large investors who have invested in the crypto-market since its birth.
This OTC trade guarantees a direct negotiation between the parties without third parties’ interference, unlike Traditional Exchanges. They also ensure a high level of privacy and the ability to negotiate a price for assets outside of the crypto-market indicators in real-time.
Many trades happen through social networks such as Telegram, Skype, and Facebook. Still, these routes are risky, so the leading companies in the sector, such as Binance, Bittrex, Coinbase, Circle, Huobi, Itbit.com, Okex, and Poloniex offer this service with the security measures that we already know as KYC and AML.
Peer-to-Peer (P2P) Exchanges:
Unlike traditional exchanges that manage all operations centrally in an order book, P2P exchanges facilitate exchanges between individuals. Users create public lists of the number of cryptocurrencies they would like to buy or sell, and other users can reply and negotiate the terms with them directly through a private chat window.
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Once the terms have been worked out, the two parties coordinate the transfer in person or online using: fiat bank transfers, gift cards, among other assets.
The party that sells cryptocurrency can often use the exchange as an escrow service, sending them the cryptocurrency for them to hold until the seller has received payment. At this point, the exchange delivers it to the other party. P2P exchanges can have custody or non-custody. In the case of scams, disputes can be opened, and victims will be reimbursed, depending on the event.
P2P exchanges are wildly popular in underdeveloped or developing countries. These nations do not have a solid traditional banking structure. The best examples are the countries of Latin America and Africa. The most popular P2P exchanges in the crypto-market are: Remitano, Localbitcoin, Paxful, and recently Binance has just incorporated this service and other large companies in the field.
Read more about best peer-to-peer (p2p) cryptocurrency exchanges
This Exchange model is called instant because the process of registration, verification, and execution is much faster than that of Traditional Exchanges.
In Instant Exchanges, it is only necessary to provide an email (or a social network) and a wallet. The KYC and AML processes are required when the exchanges are to be made with fiat currency. As an addition, the term instant also has to do with the fact that the interface is often much friendlier compared to that of Traditional Exchanges.
The operation of Instant Exchanges basically lies in the fact that there is no custody by a third party, that is, the same user controls the passwords, the sending and receiving of cryptocurrencies in their wallets. But despite this, the Instant Exchange operations work through the main Traditional and centralized exchanges in the world.
This functioning brings with it the following advantages and disadvantages:
- The possibilities of scams by Hackers are reduced since the wallets will always be in the hands of users. Remember that large Traditional Exchanges are ideal targets for hackers due to the large volumes of commercialization.
- Greater privacy and confidentiality.
- Instant Exchange to have a clear vision of where the best offers are of the crypto-market, something beneficial when making the best investments and getting the most advantage economically for the traders.
- Instant exchanges are ideal for one-off investors, apprentices, and the few experienced ones who find Traditional Exchanges’ interface complicated.
- Instant Exchanges have a great contradiction as a disadvantage, and this consists in that although it seems positive that the wallets within this type of Exchange are now under the control of their own users. This also implies users need a degree of responsibility and knowledge regarding how they should handle their wallets since failure to do so can lead to irreversible losses on deposits and withdrawals in cryptocurrencies. It is a contradiction because the target of instant exchanges seems to be precisely that of newbies who only seek to make a quick and punctual investment.
Check out this complete guide on Blockchain wallets for beginners.
As we have realized, there is a universe of financial opportunities and possibilities through the different types and modalities of cryptocurrency exchanges.
As varied as the cryptocurrencies are in the crypto-market, so are the exchanges through which they are traded. The best advice is to do a self-analysis and study of each merchant’s role within the crypto-cosmo and the services and features they offer.