With the rising popularity of digital currencies, more and more people are looking for exchanges that allow them to buy, sell and trade cryptocurrencies. Currently, we find two main types of crypto exchanges: centralized and decentralized. In this guide, we’ll be focusing on centralized crypto exchanges, their advantages, disadvantages and how to use them to start trading crypto.
What Are Centralized Cryptocurrency Exchanges?
Similarly to a brokerage, a centralized exchange is a company-owned platform that allows its users to buy, sell and exchange digital and fiat currencies. They act as a middleman between the buyer and seller in trades, facilitating exchanges while being responsible for holding, protecting and transferring your assets. In return for their services, centralized exchanges charge their users transaction fees and other commissions. However, unlike a brokerage service, centralized exchanges are not restricted to a schedule and are available to its users 24/7.
Some examples of popular centralized cryptocurrency exchanges include Coinbase, Kraken and Binance.
Decentralized vs Centralized Exchanges?
There are two main types of cryptocurrency exchanges: centralized and decentralized. Centralized exchanges act as an intermediary between buyers and sellers, facilitating trades. On the other hand, decentralized exchanges offer a platform for peer-to-peer trading without any third party by executing trades through smart contracts.
These are some important differences between these types of exchanges:
- Centralized exchanges operate under governmental regulations dictated by the jurisdictions where they operate while DEXs are unregulated.
- Centralized exchanges conveniently allow users to exchange fiat-to-crypto or vice versa while decentralized exchanges mainly support crypto-to-crypto trading.
- Decentralized exchanges don’t have custody of your assets or access to your private keys, while centralized exchanges take custody of and manage your assets for you. If you are looking for a non-custodial storage solution though, most centralized exchanges support crypto wallets for storage.
- Decentralized exchanges, requiring no third-party for transactions, have smaller and more transparent transaction fees than centralized exchanges.
Advantages
User friendliness
Centralized exchanges offer intuitive platforms that are easy to access and navigate that are easy to adopt. Trading is available on the web or through an app without any complex operations from the users’ end. For this reason, these exchanges are more popular among beginners that want to start trading crypto.
Fiat Gateways
Centralized exchanges make crypto trading more convenient and accessible for everyone by allowing users to use fiat currencies and accept wire transfers and bank cards. They make it possible for users to purchase crypto, cash out to fiat and trade between both types of currencies.
Disadvantages
Hacking risk
The company’s servers and infrastructures have a direct impact on performance and security. Centralized exchanges hold a large amount of assets, making them an attractive target for hackers and attacks.. In fact, several exchanges such as MTGox and BitGrail have been subject to attacks in the past.
Regulation
Centralized exchanges are regulated by the governments under the jurisdiction where they operate. Regulating bodies hold power over the exchanges and have the power of shutting them down, freezing account funds or soliciting them to disclose their users’ personal data.
Less Transparency
Centralized exchanges are owned by private companies and therefore do not disclose all their operations to the public. This creates some risk for traders which is why it is recommended to trade on exchanges owned by reputable, well-established companies.
Fees
While providing a high level of convenience and a comfortable trading experience, centralized exchanges have higher trading fees than decentralized exchange alternatives.
What to look for in centralized exchanges?
Here are some of the qualities you should look for when selecting a centralized exchange platform for trading:
- High trading volume and liquidity: Crypto prices are very volatile which means that when a trade is being executed token prices can change from the time a transaction is initiated and finalized. High liquidity and a high trade volume allow exchanges to quickly process trades and lock in prices during transactions.
- Reliable security measures: Before trading on any exchange, you should evaluate the security measure offered by the platform. Some features to look for include offline storage for crypto, security audits, and asset insurance against theft.
- Variety of supported assets: Not all currencies are available on all platforms. If you are looking to trade specific assets, it is important to verify that the assets are supported on the exchange of your choice. Large cryptocurrency exchanges support a wider range of coins and tokens.
- Convenient trading fees: Fees can vary across different platforms so when selecting an exchange to trade in, you should examine their fee structure.
Best Centralized Exchanges
Coinbase
Coinbase is a well-established exchange that is very popular amongst beginners. It is accessible via their website and can also be used via a mobile app. Coinbase has been around since 2012 and has expanded to 73 million verified users across 100 different countries. The exchange allows its users to start trading with as little as $2 dollars and supports over 60 different assets. It also implements strong security measures and offers users its own non-custodial crypto wallet for the storage of their assets.
Kraken
Kraken, founded in 2013, is a popular crypto exchange that offers both basic and advanced trading features, making it an appealing option for beginners and experienced traders alike. It supports 50 different cryptocurrencies and allows users to start trading with as little as $10 dollars. Security wise, Kraken has several measures in place such as offline storage for 95% of deposits, encryption for sensitive data and two factor authentication for accounts.
Kukoin
Kukoin is fairly more new than the previously mentioned exchanges but has quickly become one of the more popular platforms. Its trading minimum ($1 dollar) and affordable trading fees makes it widely accessible. Other of its advantages include its support of over 500 coins and access to a variety of trading features such as lending, margin trades and more. You can use Kraken online or on its mobile app.
Binance
Binance is a popular crypto exchange available worldwide on their website or a desktop and mobile app. However, due to regulations, investors in the United States must use the Binance.us exchange. The worldwide exchange offers a wide variety of trading options and supports over 300 cryptocurrencies. It also has the advantage of providing its users 24/7 support, having affordable trading fees and allowing users to earn rewards by staking their assets.
Crypto.com
Crypto.com is a Hong Kong based exchange founded in 2016 and allows users to trade with 150 virtual currencies. It charges up to 0.40% in trading fees which is reasonable compared to other exchanges. Additionally users can get discounts on these fees by holding the exchange’s coin. The platform supports crypto staking,
Centralized Exchanges: Bottom line
Crypto exchanges are divided into centralized and decentralized exchanges. CEXes have high adoption rates and are generally the first point of contact for beginner traders due to their user-friendly platforms. However, there are some risks and disadvantages to trading on centralized exchanges which should be kept in consideration, especially if no crypto wallet is used to safe keep your investments.