Cryptocurrency exchanges are online platforms that allow you to exchange one cryptocurrency for another cryptocurrency (or fiat money). In other words, depending on the exchanges, it is either a stock exchange or a currency exchange office.
Exchanges are the entry point for investors wishing to enter the cryptocurrency case. But not the entire exchanges deliver the similar services and it is vital to know the distinctions between the different types of exchanges.
Are you an institutional or private trader? Are you looking for an anonymous or fully regulated trading platform? Are you looking for derivative products?
Cryptocurrency exchanges operate in the same way as traditional exchanges. They allow to exchange cryptocurrencies between them; some exchanges also allow users to exchange cryptocurrencies for fiat currencies such as the dollar or the euro, such as currency.com.
There are two kinds of cryptocurrency exchanges: centralized exchanges (CEX) and decentralized exchanges (DEX). Centralized cryptocurrency exchanges require their users to deposit their funds on the platform before they can trade, while decentralized exchanges are designed so that users keep control of their own funds at all moment.
It is vital to note that cryptocurrency exchanges decentralized or centralized happens not to be subject to the similar regulations as other kinds of asset exchanges. Objects that define themselves as cryptocurrency exchanges use to be very alike to regulated financial exchanges, nevertheless, even the most important cryptocurrency exchanges have a number of important differences in the management of client funds, transparency of ‘execution, reporting and verification of operations, regulatory oversight and risks.
Centralized exchanges (CEX)
Also known as CEX, centralized cryptocurrency exchanges are similar to traditional stock exchanges. Buyers and sellers meet and the exchange acts as an intermediary.
Each centralized exchange has its own system to keep users’ assets and this often poses a problem of vulnerability to hacking, since the lack of transparency on cybersecurity practices, security audits and the location of servers can lead to to question the security of a centralized exchange.
Centralized exchanges which do not offer their users the possibility of exchanging fiduciary pairs often have lower costs than those which do. Many centralized exchanges also charge fees for withdrawals.
The often ambiguous regulations applied to cryptocurrency exchanges pose a number of legal and compliance issues, including the fact that centralized exchanges maintain their own transaction records. But there are advantages, as customer information cannot be viewed in the public blockchain. However, it also means that clients cannot easily verify proof of performance and assets.
Decentralized exchanges (DEX)
Decentralized cryptocurrency exchanges aim to stay true to the philosophy of the cryptocurrency industry. A DEX doesn’t depend on an intermediate to save your funds. It happens to be a market where sellers and buyers meet and develop transactions between them directly.
Decentralized exchanges are encrypted exchange markets and thus hard to hack. They do not rely on a third party to stock their users funds. In other words, when you use a decentralized exchange, you remain the sole holder of your cryptocurrencies; unlike centralized exchanges that require you to deposit your funds with a third party before you can start trading.
In addition, decentralized exchanges do not offer their users the possibility of exchanging fiat currencies with cryptocurrencies.