How Do Cryptocurrency Exchanges Work?
Recently, we have seen a bull market in cryptocurrencies, which has meant an increase in the adoption of all types of digital assets, which has increased the legitimacy and popularity of cryptocurrencies in general. Financial institutions, investment companies, corporations, and retail investors are coming on board, many for the first time.
If you are interested in taking advantage of the opportunities provided by the cryptocurrency space, you may be wondering where to start. In this guide to buying cryptocurrency on exchanges, we will look at some important questions that you should ask before getting started.
How do cryptocurrency exchanges work?
What is the difference between centralized and decentralized exchanges?
How many cryptocurrency exchanges should you buy cryptocurrency on at any given time?
What risks are associated with the use of a cryptocurrency exchange in 2021, and what regulation exists?
Are you ready? Let’s get started!
What is an Exchange?
Websites and mobile applications of cryptocurrency exchanges allow users to buy, sell, or exchange digital currencies for other assets, such as fiat (GBP, EUR, USD, etc.) or other cryptocurrencies.
The Main Types of Cryptocurrency Exchanges
Countless cryptocurrency exchanges offer different coin options with larger and smaller trading volumes, additional platform capabilities, and various security measures. To diversify your trading as much as possible and reduce the risk of account hacking, it is worth holding currency on two or three different exchanges simultaneously.
There are also several different models of cryptocurrency exchanges. One of the differences is whether you can use the fiat currency to buy the cryptocurrency you trade on the exchange and whether you can convert your cryptocurrency back to fiat after closing positions.
Another significant difference between exchanges is centralization or decentralization.
The Best Centralized Cryptocurrency Exchanges
The most famous and largest exchanges are usually centralized.
These include Coinbase, the largest of all cryptocurrency exchanges by the number of users; Binance, the largest by trading volume. And Gemini, another major competitor in this area. Centralized exchanges are top-rated among novice crypto investors, as they are usually more intuitive and offer specialized round-the-clock support through various social channels and chat.
Another factor that makes centralized exchanges suitable for beginners is that they take on the custodial responsibility for storing your private keys.
As a rule, this is much safer than storing data on your device since exchanges spend millions on cybersecurity to ensure the integrity and safety of your personal information.
A forgotten initial phrase or an incorrectly stored address can mean the irretrievable loss of all your savings, so many beginners find peace of mind by transferring responsibility for data storage to a large, authoritative, centralized wallet.
RISK FOR BUYERS AND SELLERS
However, there is a danger of transferring responsibility for your private keys into the hands of the exchange, which is the risk of losing your funds if the exchange becomes insolvent or is hacked.
In 2019, cryptocurrencies worth $ 292,665,886 and 510,000 user logins were stolen, and in 2020 there were five significant hacks of exchanges, during which $ 286,933,760 worth of digital currency and 200 units of customer data were stolen.
The situation is gradually improving from year to year. Exchanges are learning to protect their systems better. For example, the centralized cryptocurrency exchange Binance was able to protect users ‘ funds when it was hacked, thanks to its Secure Asset Fund for Users, which reinvests part of the company’s profits in a reserve fund in case of an attack.
The Best Decentralized Cryptocurrency Exchanges
Unlike their centralized counterparts, where a central server controls financial activities, decentralized exchanges (DEXs) are applications built on the blockchain that use smart contract technology to carry out direct peer-to-peer transactions. Payments are faster and smoother than in a centralized system since there is no client verification procedure.
Among the best examples of decentralized exchanges are UniSwap, one of the fastest-growing DEX, Kyber, and 1inchExchange, a leading aggregator. This type of cryptocurrency exchange, as a rule, offers a broader selection of cryptocurrencies, as well as access to liquidity pools, where in exchange for providing funds, you can earn trading commissions from transactions occurring in the pool, in proportion to your share in the total liquidity.
On the other hand, DEX is generally unregulated, which puts you at particular risk due to fraud and weak security. In addition, you often have nowhere to turn in case of problems — there is no support infrastructure, such as phone, email, or customer support. For better or worse, you are your bank.
When using DEX, you are the custodian of your private keys. You are fully responsible for the security of your cryptocurrency, both on and off the network, fully owning your coins.
Unlike a centralized wallet stored in your profile on a central server, on a decentralized exchange, you connect your wallet either offline using a hard wallet such as Trzeor of Ledger or online using a web wallet such as MetaMask.
Regulation and Cryptocurrency Exchanges in 2021
One of the biggest problems faced by cryptocurrency exchanges is the uncertainty of regulation. Centralized exchanges can have a license and apply regulatory protocols, such as” Know Your Customer,” which requires documentary proof of identity and anti-money laundering procedures that protect against fraud. According to the latest estimates, there are 216 international crypto exchanges, of which only 14% are licensed.
This new asset class is developing at an incredible pace, and it is difficult for governments and other regulatory bodies to keep up with the times. The main problem is that each country and jurisdiction has its legislation, while some regions support blockchain technology, while others actively prohibit the purchase and sale of cryptocurrency. In some cases, the laws are vague, and the legislation only partially covers the complexities of operations with digital assets. For the cryptocurrency sphere to be perceived as a safe, legal, main investment option, much work needs to be done.
Do You Need a Cryptocurrency Exchange to Invest in Cryptocurrencies?
If you want to invest in digital currencies, you do not have to buy and sell cryptocurrency on the exchange. One of the ways to minimize your risks, especially if you are a relative newcomer to cryptocurrencies, is to use an automated platform integrated with numerous exchanges and implement a strategy for investing in cryptocurrencies on your behalf.
An increasingly popular way to make investing safer and more straightforward is crypto-arbitrage — a type of investment that uses temporary price inefficiency — the difference in the price of a coin on different exchanges.
Don’t panic! Your future can still be luxurious…
An amount of only $ 300 can bring you 15–20% profit every month, instead of just lying in your bank account at 2% per annum.
Using an automated system such as Intelfin will make investments for you, which means that you do not need to have severe financial training to enter a highly liquid market safely.
In addition, as a platform that uses hybrid and arbitrage algorithms, it has the additional advantage of offering an exceptionally low-risk form of investment while providing a yield of up to 1% per day!
You still have time to provide yourself with much-needed security. Start investing right now!