Entering the crypto space requires you to use a crypto exchange and a crypto wallet—among many other dApps which can help maximize your gains.
Your crypto wallet stores your funds and allows you to send and receive cryptocurrencies, while a crypto exchange is where you can buy and sell digital assets.
Let’s focus on crypto exchanges.
What is a crypto exchange?
We all know that no one can purchase cryptocurrencies from banks or any investing firms.
A crypto exchange is the easiest way for traders to transact cryptocurrencies and digital assets. Simply put, it is a digital marketplace where users can buy and trade cryptocurrencies.
In addition to these trading services, crypto exchanges also offer price discovery through trading activities. Some, use crypto exchanges to store their funds as well.
Some use crypto exchanges to trade digital assets from another, while others trade them with traditional currencies such as US Dollars as well.
Different Types of Crypto Exchanges
Generally, there are three types of crypto exchanges: Centralized, Decentralized, and Hybrid.
Centralized Exchanges (CEX)
A centralized exchange (CEX) tends to be more user-friendly, especially for beginners. Most traders go to centralized exchanges because it exudes ‘official’ feelings to them. Mainly because it has a KYC process, to adhere to the US anti-money laundering regulations. In other words, centralized exchanges somewhat feel similar to brokerage accounts because they ask the same questions.
It is important to note though that centralized exchanges are operated by a private company. Meaning, users do not have full control over their funds because the exchange itself has an access to their transactions, funds, and even private keys—which makes users vulnerable to malicious attacks, should the exchange be compromised.
Decentralized Exchanges (DEX)
A decentralized exchange actually is closer to the very nature of Bitcoin because it has no central hub or mediator. Servers are spread all over the world so that no single computer can compromise the entire network in case of attacks. In addition, unlike CEXs, a DEX does not require a KYC process. It is not facilitated by a centralized authority.
These two factors are among the major reasons why traders go to a decentralized exchange—because it is relatively ‘safer’ and even the sharing of information is more relaxed.
Like a centralized exchange, a decentralized exchange still has some drawbacks like issues in liquidity and low trading volume.
A hybrid exchange attempt to balance the two. A hybrid exchange combines the greater functionality of a centralized exchange and the security offered in a decentralized exchange—giving users a taste of both worlds.
Fees in Exchanges
Another important point to note is the fees associated with using these exchanges.
Exchange fees or trading fees are often present whenever you engage in any cryptocurrency transaction.
Deposit fees are paid whenever you move money into your account.
Withdrawal fees are paid whenever you withdraw money from your account.
Account fees are paid whenever you open an account.
Several exchanges (not all) incur some of these fees on your behalf. These charges are given to crypto miners who carry out blockchain transactions. However, you may anticipate paying lesser fees on a decentralized exchange.
Investment entails risk. This is why it is important to know the capabilities of each exchange before using them.
Disclaimer: This article solely expresses the author’s thoughts, which may not reflect those of Enifex. Nothing in this article should be interpreted as investment guidance. Enifex encourages all clients to do their own research before investing in cryptocurrencies.