If you decide to invest or trade cryptocurrencies you almost have no other choices as to do it on specialized cryptoexchanges. Basically, there are to types of exchanges — established and centralized exchanges and just ascending decentralized ones. It is your personal choice where to buy cryptocurrencies and do your trades but the the most important thing to consider is liquidity.
According to Investopedia:
The concept of liquidity has many facets to it. One way of defining liquidity is the ability of an asset to be converted into cash readily on demand. Another way of looking at it is when any asset can be bought or sold at its fair price. Liquidity thus means that there aren’t discounts or premiums attached to it during buy or sell and it’s easy to enter and exit the asset. It is believed as more of an item is bought and sold, the chances of charging premiums or giving discounts lower and such an asset usually trades around ‘what it is worth’.
For example, forex market is considered as a liquid market with an average turnover of more than $ 5 trillion daily. Real estate, contrary, is defined as illiquid asset. The basic concept of market liquidity could be described as follows: the asset is liquid if you can sell it anytime not pushing price of it downwards. Fiat currencies in this case are liquid and almost all cryptocurrencies, including Bitcoin, should be considered as illiquid assets. It depends on timing and market situation but traders of cryptocurrencies are well aware of this fact.
Centralized cryptoexchanges (CEX)
I have started to buy my first cryptocurrencies in late 2015. I opened my account on Coinbase and funded it with some USD to buy Bitcoin (the only cryptocurrency on the platform that time). As my goal was not only to buy and hold Bitcoins I was looking how can I buy some altcoins I liked or was willing to invest and trade. The first exchange I came accross was Poloniex. So, I registered my account and transferred some of my BTC holding to Poloniex account. As it arrived I successfully bought my first altcoins and started to trade them continuously. Very soon I understand that I can’t find some altcoins I like on Poloniex market as they were not listed there. So, officially started my journey through cryptocurrency exchanges. The second account I opened was on Bittrex exchange. I repeated the same act — transferred some BTC from Coinbase and bought altcoins. Later on I found interesting to me margin trading and lending services on Bitfinex. As cryptocurrency market evolved enormously through 2017 I opened more accounts on different exchanges for investment and trading purposes. All of them were on centralized exchanges.
When we are talking about centralized exchanges one must consider the fact that you completely rely on third party. Counterparty risk in centralized exchanges is disadvantage leading to risk to lose your funds. Generally, you’re not in control of you private keys and all balances are at risk in case of hack. The other dark side of centralized cryptoexchanges is that sometimes for unknown reasons they can freeze wallets of any listed assets and you’re unable to deposit or withdraw funds when you wish to do it. The latest example of this activity is freeze of BitShares wallet on Poloniex:
Finally, centralized cryptoexchanges could be closed by decision of governments as it happened in China this year.
Decentralized cryptoexchanges (DEX)
As I mentioned above alternative to centralized cryptoexchanges are decntralized ones but they are just ascending. The advantage of trading on decentralized exchanges are full control of your assets as you own your private keys. You are also trading and investing in anonymous manner and it is logical step for decentralized cryptoassets.
Disadvantages of decentralized cryptoexchanges are slow speed of order execution, poor supply of cryptoassets, difficult to use for regular users, user unfriendly interfaces and very low liquidity in comparison with biggest centralized exchanges. There are two decentralized exchanges that I like the most and tried to trade there: BitShares and Waves DEX. Both are in development, so you shouldn’t expect to much as of now but in the future both of them should be capable to compete with CEX. What I like about BitShares DEX (if you have account on it you can trade on Openledger DEX as well as it is built on BitShares network) is relatively high operational speed and lifetime membership program. Lifetime Members get 80% cashback on every transaction fee they pay and qualify to earn referral income from users they register with or refer to the network. A Lifetime Membership is just 1456.76103 BTS. You’ll also have your referral link to invite new members to DEX and get profits if they’re trading on it. For example, Every time your referral pays a transaction fee, that fee is divided among several different accounts. The network takes a 20% cut, and the Lifetime Member gets a 30% cut. That is nice addition to your trading and it also helps to attract more customers to trade in decentralized manner.
Waves DEX has their own liteclient with integrated DEX you can safely trade and hold your favourite assets. They’re also working on improvments of DEX. Interface should change significantly as well as speed of operations. This move should attract more users to this exchange. I think that Waves have potential to compete with some CEX and build strong customer community.
Probably the most strong impulse of DEX is coming from Ethereum environment. Projects like 0X, Kyber Network, Radar and others could change DEX environment significantly. We should expect more solutions for decentralized trading of cryptoassets in the future.
Government regulations on CEX
There are many people who are thinking that governments will ban centralized cryptoexchanges the thing you can’t expect to happen with DEX. However, I don’t think that governments are going to ban CEX as it is the only method for them to collect some useful data of its customers. Regulations will happen in the future but it will be connected with KYC and AML policy. Governements can’t risk to ban CEX and expel customers to use DEX. It should happen naturally as crypto market will grow and evolve in bigger and more advanced ecosystem.
In upcoming articles I’m going to analyse some cases of CEX trading and advantages you can get switching from one CEX to another one.