Crypto exchanges are basically online markets where you can buy and sell cryptocurrencies in exchange for fiat currency or other cryptocurrencies.
The existing diversity of crypto-exchanges
In most cases, crypto exchanges work as intermediaries, which provides the trader with many advantages. But in other cases, they are just decentralized tools.
Every cryptocurrency seller should explore this range of benefits to find out what best suits their needs:
- Trade security.
- Getting the best offer on the market for both buying and selling.
- Extensive conversion options with other assets. Can users convert between cryptocurrencies, fiduciaries, and even valuable assets like gold?
- Challenge options in case of fraud (this advantage especially applies to centralized peer-to-peer (P2P) and OTC platforms).
- Possibilities of compensation in case of fraud (proven) This advantage is especially relevant for centralized P2P and OTC exchanges.
- Efficient and time-saving trading experience.
- Low conversion fees compared to informal traders.
- Income from storing cryptocurrency in wallets.
- User-friendly, professional or simple interface depending on the needs of traders.
- Security of crypto assets in the hands of third parties.
As we can see, how diverse crypto platforms can be, their capacity and financial capabilities. Therefore, to better understand this, we need to break them down into the types and modalities that exist in the cryptocurrency market.
Different types of crypto exchanges
- Centralized exchanges (CEX):
These are all online cryptocurrency exchanges that are controlled by a private commercial financial company. This company controls all financial transactions of the resource, which means that it is responsible for funds and transactions that are owned and executed by its users.
It is important to add that these exchanges usually comply with the KYC (know your customer) and AML (anti-money laundering) rules. This means that these platforms do not provide absolute privacy for their customers. This can be confirmed by the fact that the user must disclose their identity in order to use its services.
Examples of these platforms are Remitano, Binance, Kraken, Coinbase, and Bitfinex.
- Decentralized exchange (DEX):
These are all online cryptocurrency exchanges that are not controlled by any company. They are Autonomous and independent, like decentralized cryptocurrencies in the cryptocurrency market. All this is possible thanks to the blockchain technology (distributed registry).
It is important to note that decentralized DEX exchanges do not store funds, location, or customer information, but only serve as a routing and negotiation layer for executing buy and sell orders.
The most popular decentralized exchanges include WavesDex, Bancor Protocol, Kyber Network, EtherDelta, and AirSwap.
- Hybrid exchange:
This is a merger of the two models listed above. The functions of centralized exchange and decentralized exchange are integrated to combine the best of both, because each has its own advantages and disadvantages.
In short, hybrid resources aim to provide the functionality and liquidity of CEX with the privacy and security of DEX. Many believe that this is the real future of crypto trading.
The first hybrid exchange was Qurrex, launched in 2018. Other more recent examples are Eidoo and Stoxum.
Terms of the exchange
- Customary exchange:
These are online exchanges that allow users to trade between cryptocurrency pairs. A unique feature of this exchange model compared to others is that prices in the crypto market regulate the trading of crypto assets in real time. That is, there is no room for speculation.
Most of them are usually centralized and regulated platforms, so they generally meet the KYC (know your customer) and AML (anti-money laundering) standards. This also implies that these platforms do not promote the privacy of personal data, since the user must disclose their identity in order to use them.
It is important to note that traditional exchanges usually charge for their services and set certain capital limits for participation in their platforms. These terms and amounts can be as diverse as offers on the cryptocurrency market.
Examples of this exchange model: Binance, Kraken, Coinbase, Bitfinex, HiBTC, etc.
- Crypto brokers
This service works similarly to the traditional one. This is mainly because it also works with user-set bids for buying or selling crypto assets, as well as a small Commission for each transaction.
But the main feature of these sites is that they are mainly focused on cryptocurrencies. Perhaps brokers are a favorite option for new users because of the ease of exchanging crypts.
A Prime example of this service is Coinbase (the largest bitcoin broker in the world, available in more than 30 countries).
- Cryptocurrency funds
These funds are professionally managed offers that allow you to buy currency through the Fund you want to invest in.
The advantage of this method is that it saves the user from having to store the cryptocurrency that they buy or sell. Instead, it acquires a portion of the asset Fund it invested in. After investing, the account Manager performs trading tasks, and investors can cash out their profits when necessary.
Grayscale is a typical example of cryptocurrency funds.
- OTC exchange
OTC platforms are another way to trade cryptocurrencies, especially for large transactions.
These crypto platforms are very similar to traditional OTC platforms, where small and large companies trade commodities, stocks, and derivatives. In other words, they offer an exchange between buyers and sellers. But only cryptocurrencies are traded here. Often in the over-the-counter cryptocurrency market, the client users who trade are cryptocurrency miners or large investors who have invested in the crypto market since its inception.
This over-the-counter trading guarantees direct negotiations between the parties without interference from third parties, unlike traditional exchanges. They also provide a high level of privacy and the ability to negotiate the price of assets outside the indicators of the cryptocurrency market in real time.
Many transactions are made via social networks such as Telegram, Skype, and Facebook. However, these paths are risky, so leading companies in the sector such as Binance, Bittrex, Coinbase, Circle, Huobi, Itbit.com Okex and Poloniex offer this service with security measures that we already know as KYC and AML.
- Peer-to-peer exchanges
Unlike traditional exchanges that centrally manage all operations in the order book, P2P exchanges facilitate exchanges between people. Users create public lists of the number of cryptocurrencies they would like to buy or sell, and other users can respond and discuss terms with them directly through the private chat window.
After the agreed terms, both parties coordinate the transfer in person or online, using, among other things, Fiat Bank transfers, gift cards, etc.
The party that sells the cryptocurrency can often use the exchange as an escrow service, sending them the cryptocurrency for storage until the seller receives the payment. At this point, the exchange delivers it to the other party. P2P exchanges can have a Depository or non-custodial nature. In the case of fraud, disputes may be opened, and victims will be compensated depending on the event.
P2P exchanges are very popular in underdeveloped or developing countries. These countries do not have a strong traditional banking structure. The best examples are Latin America and Africa.
The most popular P2P exchanges in the cryptocurrency market are: Remitano, BIT.TEAM, Localbitcoin, Paxful, and recently Binance has included this service, as well as other large companies.
- Instant exchanges:
This exchange model is called instant because the registration, verification, and execution process is much faster than traditional exchanges. You only need to specify your email address (or social network) and wallet. KYC and AML processes are necessary when an exchange must be made using a Fiat currency. In addition, the term “instant” is also related to the fact that the interface is often much more convenient than the interface of traditional crypto platforms.
The work of instant exchanges mainly consists in the fact that a third party does not store them, that is, the same user controls the passwords, sending and receiving cryptocurrencies in their wallets. But, despite this, operations work through the main traditional and centralized exchanges in the world.
This operation has the following advantages and disadvantages:
- The possibility of fraud by hackers is reduced, since wallets will always be in the hands of users. Keep in mind that large traditional exchanges are ideal targets for hackers due to the high volume of commercialization.
- Greater privacy and privacy.
- Instant exchange to have a clear idea of where the best offers of the cryptocurrency market are located, which is beneficial when making the best investments and getting the maximum economic benefit for traders.
Instant exchanges are ideal for one-time investors, beginners, and those few experienced people who find the interface of traditional exchanges complex.
The only downside to instant exchanges is that, while it seems positive, the wallets in this type of exchange are now under the control of their own users. This also implies that users need a certain degree of responsibility and knowledge about how they should handle their wallets, as failure to do so may result in irreversible losses when depositing and withdrawing funds in cryptocurrencies. This is a contradiction, because the goal of instant exchanges seems to be the goal of newcomers who only seek to make quick and timely investments.
As you understand, there is a whole world of financial opportunities due to various types and modalities of cryptocurrency exchange.
No matter how diverse crypto assets are in the crypto market, the exchanges through which they are traded are also diverse. The best advice is to conduct a self – analysis and study the role of each seller in the crypto space, as well as the services and features they offer.