Are you willing to invest in crypto? Cryptocurrency seems to be a new buzzword these days, but before you opt to invest in crypto, you need to know how safe it is to invest in cryptocurrency.
Countries across the globe are heading towards digitalization, and investing in cryptocurrency is a cashless and paperless initiative. But, Experts say that investing in cryptocurrency is one of the riskiest investment choices to date.
With this article, you will get to know what is cryptocurrency and crypto exchange in detail. Also, I will sum up the essential factors you need to know as a buyer before investing in crypto exchange.
What is Cryptocurrency?
Cryptocurrency is used for trading digital currencies or cryptocurrencies and exists electronically. Unlike fiat currency, they are not governed by a central bank and work using Blockchain technology.
Blockchain is a decentralized technology that works using records that link to the previous block in chronological order.
Many companies worldwide have issued their currency called "tokens" that can be traded specifically for the goods and services the company provides.
Now that you know what exactly a cryptocurrency is, you might feel like buying and trading cryptocurrency. But, the thing is that you cannot buy or trade crypto from a bank. You need to create an account on a crypto trading platform to exchange your currency for digital assets.
For all this, you need to know what crypto exchange is, its types, advantages, disadvantages, and the name of some of the top cryptocurrency exchanges based upon the traffic, liquidity, and trading volumes.
What is Cryptocurrency Exchange?
A cryptocurrency exchange is a platform by which users can trade cryptocurrencies using electronic money units, fiat currencies, and digital assets. It is also known as Digital currency exchange.
Cryptocurrency is secured under a cryptographic system and based on blockchain technology that makes it impossible to counterfeit and double spend. The user can keep the crypto within the online account and transfer them to their crypto wallet later.
It works as an intermediary between the buyers and the seller without revealing the identity of both. Both parties make money through transaction fees and commissions.
Fiat currencies are the currencies that the government declares as legal tender. Examples are Dollars, Pounds, Euros, Yen, and Yuan. In contrast, digital assets exist virtually, such as digital currency, virtual property, domain names, files, etc.
Types of Cryptocurrency Exchange:
Now, we will look at the types of cryptocurrency exchanges, their advantages, and their disadvantages.
1. Centralized Cryptocurrency Exchange
The exchange acts as a party between the buyer and seller. All the crypto transactions go through centralized exchanges as it offers more reliability to both parties.
Some of the examples of centralized cryptocurrency exchanges include:
2. Decentralized Cryptocurrency Exchange
This exchange(DEX) allows the users to perform peer-to-peer transactions without involving a third party. It does not facilitate the trading of fiat currencies for cryptocurrencies.
Examples of decentralized cryptocurrency exchanges include:
Advantages of Centralized Cryptocurrency Exchanges:
Centralized cryptocurrency exchange offers its newbie investors user-friendly websites and applications where you can log in to the accounts, view the account balance, and make transactions easily.
It provides investors a friendly way to invest and trade in cryptocurrencies instead of crypto wallets and peer-to-peer transactions.
Centralized cryptocurrency exchange provides more secure and reliable transactions by facilitating transactions through a centralized platform.
Disadvantages of Centralized Cryptocurrency Exchanges:
#1. Hacking risk
One of the most significant disadvantages of Centralized cryptocurrency exchanges is that they invite hackers to eye on the holding of their customers.
Mt.Gox, a Japanese and world's largest cryptocurrency exchange company, had a devastating hit in the largest bitcoin hack to date where the hackers accessed and stole 740K bitcoin from its Gox customers and 100,000 from the company itself.
#2. Transaction fees
The transaction in centralized cryptocurrency exchange is very high, unlike the peer-to-peer transactions. The service and convenience fee goes in the same proportion as the trading amount. The more the trading amount, the more will be the service and convenience fee
Advantages of Decentralized Cryptocurrency Exchanges:
#1. Mitigates hacking risk
The investors in decentralized cryptocurrency exchange are assured of greater safety as there is no risk of being hacked. Here, the users are not required to transfer their assets to a third party.
#2. Preventing market manipulation
Since decentralized cryptocurrency exchanges allow the peer-to-peer exchange of cryptocurrencies, it helps users prevent fake trading, market manipulation, and wash trading.
The investors stay anonymous through the exchange process as it does not demand them to fill out the KYC forms hence offering privacy and anonymity.
Disadvantages of Decentralized Cryptocurrency Exchanges:
The users of decentralized cryptocurrency exchange need to remember their crypto wallets' secret keys and passwords because they don't have any other option to recover them. The entire process is troublesome and time-consuming, and the investors will never recover the lost assets.
#2. Liquidity struggles
Almost 99 percent of the crypto transactions are facilitated by the centralized exchange accountable for most of the trading volume. But, due to lack of volume and liquidity struggle, it becomes difficult to find buyers and sellers.
The 10 Best Cryptocurrency Exchanges
Top Centralized Exchanges
Have a look at the following top centralized cryptocurrency exchanges. The ranking is based on traffic, liquidity, and trading volumes.
Top Decentralized Exchanges
These are the decentralized cryptocurrency exchanges as per the traffic, liquidity, and trading volumes:
What factors do you need to know before choosing the best crypto exchange?
Make sure you are investing your money at the right place, and for this you need to consider the following factors before choosing the best crypto exchange.
One of the biggest cons of investing in crypto exchange is that there is no central institution to look after it. This means that the money is not protected in the same way as banks and other traditional investment centers.
Crypto exchanges like Coinbase and Gemini keep your money in US dollars, and the money is secured under FDIC (insured bank accounts). However, FDIC does not apply to cryptocurrency balances.
Others, like Kraken, rely on their security practices to protect clients rather than insurance policies.
Coinbase also provides its users an insurance policy worth $255 million in case its reserves are hacked. The money of the account holder is protected within the exchange from any hacking or fraud.
Other crypto exchanges like Kraken believe in their security practices to protect their users' money from being hacked rather than relying on insurance policies.
A financial advisor, Douglas Boneparth, from Bone fide wealth in New York, says that a listed crypto exchange in Nasdaq stock will help the investors eye on the company's actual health and help them make better decisions before investing in it.
Many popular crypto exchanges charge higher fees and hence provide added protection and bigger insurance. The exchange fee is a percentage of your trade and sometimes is based upon the price volatility.
The fees these crypto exchanges charge are charged per transaction. However, it varies for both the seller and buyer. Other factors include the currency in which the investor is trading.
# Educational tools
As an investor, the user needs to have extensive knowledge about the terms like digital assets, different kinds of coins, and blockchain technology, as it will help the user choose the best crypto exchange.
Coinbase puts videos and quizzes on its site to provide learning opportunities to its users. When the user watches these videos and completes the quizzes, the company offers rewards for learning about new coins via its Coinbase Earn program.
The exchange will provide you with a portion of the crypto that the user can hold or convert to something else.
While other exchanges promote the habit of these educational learning tools by offering courses and articles on crypto history, markets, and other innovations such as Binance Academy from Binance.
Your money is your valuable asset, and you need to know all the additional factors before investing in a crypto exchange. Take time to learn new things about it, go through the security measures and fee structure because you will put your money into something more volatile than the other risky assets.
Suppose you are all set to invest in the crypto exchange. In that case, you can contact the top crypto exchange development company in India as they will provide you the best services on the crypto exchange, bitcoins services, wallets, and apps to reinforce their price standards with companies and clients.