So you’re looking to get in on the crypto craze and you’ve been wondering how and where you can get your hands on digital currencies. The very short answer is a cryptocurrency exchange, of which there are three main types.
Finding the right type of exchange to suit your needs is very important. You might be looking to buy digital assets as a long term investment, or perhaps you want to try your hand at trading cryptos for short term profits. You might even be looking to set yourself up to incorporate cryptocurrency as a method of purchasing goods and services, and my personal favorite, gambling with cryptocurrencies.
We’re going to be focusing on the three main types of cryptocurrencies and how they operate. But first, let’s get down to the basics.
What is a Cryptocurrency Exchange?
Similar to a regular stock exchange, a crypto exchange focuses on the buying, selling, and trading of digital tokens, where a stock exchange deals in the trading of stocks, bonds and other financial instruments.
Essentially, a crypto exchange is a platform that allows customers who are interested in buying and selling cryptocurrency assets, to exchange these digital tokens for others as well as trade fiat currencies (government-issued currency) for digital currencies, or vice versa, in values based on current market prices.
What are the Three Main Types of Cryptocurrency Exchanges?
- Centralized exchanges (CEX)
- Decentralized exchanges (DEX)
- Hybrid exchanges
Centralized Cryptocurrency Exchanges
This is the most common type of crypto exchange and is also known as a traditional exchange. Centralized crypto exchanges act as a third party between a buyer and a seller and are operated and controlled by a company, therefore offering a higher level of reliability.
It is estimated that approximately 99% of all crypto transactions move through centralized exchanges. These exchanges are popular among beginner investors because they offer a familiar and user-friendly way of investing and trading with cryptocurrencies.
Centralized exchanges also offer an extra layer of security when it comes to performing transactions and trading, as transactions are facilitated on a highly developed and centralized platform.
Because trading is performed on the exchange’s database, these centralized exchanges are more susceptible to cyberattacks, but this does not necessarily mean that users are in danger of falling victim to cybercrimes and hackers.
Here are 5 of the top centralized cryptocurrency exchanges :
A graphic representation of centralized vs. decentralized cryptocurrency exchanges
Decentralized Cryptocurrency Exchanges
This type of cryptocurrency exchange allows users to perform peer-to-peer transactions without the need for a third party or an intermediary. The exchange does not handle funds on its own, but rather facilitates wallet-to-wallet trading.
The decentralized exchange service uses specialized networks and software to allow automated transfers to send money or digital assets between two users, allowing wallet-to-wallet transactions with very little or sometimes no personal information required.
Decentralized exchanges do not facilitate the purchase of cryptocurrencies using fiat currency, making it less convenient for users who do not already own digital currencies. However, because users do not have to transfer their assets to a third party, the risk of suffering losses due to a company or organization being hacked is minimal, or even non-existent.
Due to the peer-to-peer nature of transactions and trades performed using cryptocurrencies on decentralized exchanges, users are protected from fake trading and wash trading activities related to market price manipulation.
Decentralized exchanges tend to be a lot more complicated as users need to remember privacy keys and passwords to their crypto wallets. If his valuable information is lost, so are the assets held with the exchange or with the cryptocurrency wallet.
If you want to make use of this type of trading platform, then you’ll have to become well-acquainted with the processes and the platform itself, which does not always provide the user-friendliness related to CEX exchanges.
Decentralized cryptocurrency exchanges are also very popular among traders who prefer anonymity, as users won’t have to complete extensive KYC (Know Your Customer) forms when registering to trade, as only wallet addresses are used in most cases.
Here are 5 of the top decentralized cryptocurrency exchanges:
Hybrid Cryptocurrency Exchange
As the name suggests, hybrid cryptocurrency exchanges are a combination of both centralized and decentralized exchanges. In a sense, it’s almost as though you’re getting the best of both worlds.
Hybrid exchanges offer the speed and user-friendliness associated with centralized exchanges but use smart contracts on a blockchain network to ensure the integrity of the trade. This allows the user’s assets to be safely secured on the blockchain network instead of relying on third parties or companies.
The hybrid cryptocurrency exchange is still a very new concept and most exchanges are currenctly under developement or in the beta testing stage. There are a few current projects to look out for such as Qurrex and Eidoo Crypto Exchange which is already functioning.
Make the Right Choice!
As you can see, there are many pros and cons to each type of cryptocurrency exchange, and this is why choosing the correct type of exchange to suit your needs is very important. I hope this article has shed a little light on the main types of crypto exchanges, and that this info will get you well on your way to making your first step into the world of cryptocurrency. Check out the top 5 cryptos if you’re on the fence about which digital currency you’d like to pursue.
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