The rise in the popularity of cryptocurrency has gone over the roof in the recent past. But before cryptocurrencies and especially Bitcoin, became the popular and valuable digital asset they are today, investors could easily and cheaply mine them. Now, mining is relatively expensive and the process more complex. This is part of the reason crypto exchange platforms have become a popular place for investors instead.
When it comes to investing, the two questions that arise are how to get cryptocurrency and where you can use it. The most probable place where you can find answers to these questions is on a crypto exchange platform. This is where you can exchange your fiat money for cryptocurrency and vice versa. Some merchants also accept payments through cryptocurrency.
What's a Cryptocurrency Exchange?
It's a platform where investors looking to buy or sell cryptocurrency come and exchange digital assets at current market prices. It works like a stock exchange but for cryptocurrency rather than stocks. Transactions allowed are fiat currency to crypto and crypto to crypto. The exchange platform, although fundamentally similar, offers different features, fees, and user experiences.
However, to use these platforms, you require a crypto wallet. A crypto wallet is the digital storage unit for your public and private keys required to transact with cryptocurrency. It also provides digital signatures to authorize transactions. The coins are not stored in the wallets, only proof of their ownership.
There are different wallets; online, desktop, hardware, paper, and mobile wallets such as the Ethereum wallet app. Some wallets are built-in crypto exchanges, while others are independent. To send or receive cryptocurrency in a blockchain wallet, you'll need a blockchain wallet address.
Types of Cryptocurrency Exchanges
There are three types of crypto exchanges; centralized (CEX), decentralized (DEX), hybrid cryptocurrency exchanges.
Centralized Cryptocurrency Exchange (CEX)
CEX platforms are exchanges where a central authority governs trades from fiat to crypto and crypto to fiat currencies. They are in charge of storing funds, fulfill trade orders and purchase cryptocurrency on your behalf. Most of these platforms offer margin, spot, and futures trading on the largest coins. These types of exchanges offer the most liquidity as they record high trading volumes.
The advantages of trading on CEX are simplicity of trade because most of the trading process is handled by the administrator. Most traders prefer to use them because it feels more natural to trade through an actual organization than on an anonymous, decentralized network. The disadvantages of CEX mostly are on security. Since your cryptocurrency is stored in a central place, there's a real risk of losing it all in case of a cyberattack.
Also, CEX makes profits from running costs making fees on these platforms relatively higher. Additionally, they are operated by legal entities, making them subject to government regulations, oversight, and interference.
Decentralized Cryptocurrency Exchange (DEX)
DEX are alternatives to centralized exchanges. They do not depend on a central authority or organization to control a user's digital assets. The trading process is fully automated and can be either peer-to-peer or a customer to another. The blockchain technology used to build these exchanges ensures that users can trade securely even without a central authority. The most used technology in DEX is the Ethereum blockchain that allows the execution of smart contracts.
Besides high security, the other main advantages of DEX are that the exchanges are not subject to government interference and regulation. They also have no operating costs as they run on a peer-to-peer network. However, the downside is that being decentralized means no customer support in case you need help. They're also difficult to navigate, which can make the trading process unnecessarily difficult.
Hybrid Cryptocurrency Exchange
This type of exchange combines CEX and DEX. It takes the best concepts from both exchanges to offer the best of both worlds. Hybrid exchanges adopt the anonymity and security features from decentralized exchanges and combine with the liquidity and usability of centralized exchanges. They're future-focused, offering the creation of a next-generation cryptocurrency marketplace. They can be built as fully-fledged exchanges or as a one-page cryptocurrency exchange.
Users control their digital assets, and you can trade them directly from your wallet using smart contracts. The security risks are lower as your digital assets are on the blockchain rather than a controlling company.
The type of cryptocurrency exchange you choose depends on your unique needs. If you love the idea of trading through a legal entity, you might want to go with CEX, but hybrid and DEX are excellent for anonymity. For trading large cryptocurrencies against the market, centralized exchanges might offer the best avenue. For zero commissions, DEXs are the best options. You should also look for other features such as user interface and experience, access to popular payment methods, and a platform that can allow you to trade a wide range of cryptocurrencies. Ensure you are dealing with a reputable exchange platform to avoid getting scammed or losing your investment.