Centralized and decentralized cryptocurrency exchanges

Many day-traders use centralized exchanges and online brokerage firms to trade stocks and index funds. As a rule, having put $ 25,000 in his cash account, a trader can bypass the regulatory rule on the day trading strategy and immediately start actively trading. In addition, the presence of a margin account will also allow an individual investor to take short positions and buy commodity resources and futures.

If we talk about crypto trading, then retail investors have different opportunities for trading digital assets. With a market capitalization of $ 200 billion, there are more than 200 cryptocurrency exchanges, including cryptocurrency dark pools and traditional exchanges with Bitcoin-oriented securities. To understand how and where a retail investor can acquire digital assets, we compare the two most popular types of cryptocurrency exchanges available today in the cryptocurrency space.

CEX, or centralized exchanges

What is the difference between centralized and decentralized cryptocurrency exchanges? Investors who first think about trading cryptocurrency usually resort to centralized exchanges. Like traditional online brokerage firms and exchanges, many centralized crypto-exchanges offer similar opportunities for depositing funds, margin trading, opening short positions and trading pairs of crypto / crypto or fiat / crypto. Buyers and sellers trust an intermediary to help them store funds and conduct transactions, or to provide security and monitoring. The largest cryptocurrency exchanges in the world in terms of adjusted trading volume are, as a rule, centralized exchanges (Binance, Bitmax, OKEx, etc. – see CoinMarketcap). In addition to volume and liquidity, CEX usually have a well-designed system that automates the work of customers. Unlike using a digital wallet, where there is a risk of forgetting your private key, centralized exchanges can guarantee the safety of client funds and help investors regain access to their capital.

Although CEX has been the most popular way to trade cryptocurrencies over the past few years, they have shown vulnerabilities and security concerns. In 2018 alone, hackers stole more than $ 1 billion from centralized exchanges. This is equivalent to a daily theft of $ 2.7 million. Compared to 2017, the total amount stolen on exchanges grew 13 times last year. Also, CEX is not anonymous, as they store personal data of investors and private keys and keep their funds in hot wallets. This practice can definitely pose a threat to the personal data of investors. Many CEXs have also been accused of fictitious trading and volume boosting.

DEX, or decentralized exchanges

What is the difference between centralized and decentralized cryptocurrency exchanges?
Unlike CEX, decentralized cryptocurrency exchanges allow anonymous transactions with a minimum of information about each investor. Decentralized exchanges are preferred by more experienced crypto traders who want to completely control their funds and, to a certain extent, their personal data. DEX provides better security because they do not have access to private keys of investors and do not require clients to keep funds in hot wallets whose vulnerabilities allowed hackers to gain access to investor capital in the past. However, this does not mean that hot wallets should be completely avoided. Nevertheless, they accelerate transactions, although they have characteristic security risks. If in a simple way, then they can be compared with current accounts, and cold wallets – with savings.

In addition, opening an account with DEX can be very easy. For example, OpenLedger, a decentralized exchange from Denmark, does not require registration or customer identification, which greatly simplifies the whole process. Another DEX, Bitsquare, uses Tor to ensure complete transaction anonymity. Decentralized exchanges are better for those who are interested in buying a large amount of cryptocurrency or in trading ERC20 tokens. In addition to anonymity and complete control over capital, the blockchain revolutionized margin trading. In other words, blockchain made it possible to replace margin trading with a revolutionary hedged trading system where traders can acquire digital assets by depositing their funds in an escrow account.

CEX vs DEX

Investors should understand that they can trade cryptocurrencies on different exchanges. Understanding the benefits of exchanges of various types can have a huge impact on the financial performance of a trader. While CEX can offer good liquidity, DEX provides investors with better anonymity and offers a revolutionary hedged trading system that was not possible on central exchanges.
Beginner crypto traders usually prefer centralized sites, as they remind them of the well-known NYSE and NASDAQ exchanges and online brokerage firms such as E-Trade and Ally. Also, investors who are not involved in high-frequency trading may come up with secure anonymous p2p sites, such as Hodl Hodl. When a trader gains experience in cryptocurrency trading, or if he does not want to risk capital in margin trading and prefers to use a hedged trading system, he can switch to DEX, where he will have full control over his crypto assets.

CEX, DEX, cryptocurrency dark pools, over-the-counter p2p platforms, brokers, CME and CBOE with their securities related to bitcoin, are all part of the global cryptocurrency ecosystem. Each player has an important role to play in building a large-scale blockchain economy, and each contributes to the existence of others.