Let’s face some facts. However you look at their rise, cryptocurrencies are here with a serious intention. They mean business. Even so, when it comes to buying and selling cryptocurrencies, not to mention storing them, there is a lot of uncertainty. Many people are not willing to place their trust (and money) into cryptocurrencies for this reason.
There are still many mysteries to properly clear up for the layman to understand their nature. It can be difficult to know where to start. In this article, we will cover a key aspect of cryptocurrencies. We will look in detail at the centralized exchange as a platform.
What is a Centralized Exchange?
There are numerous investors who use centralized cryptocurrency exchanges for making transactions. However, some readers may remain in the dark.
So, just what is a centralized cryptocurrency exchange?
Put simply, a centralized exchange is a platform through which investors can buy and sell cryptocurrencies online. In fact, they are the most common platform for online transactions of holdings. So far, the explanation seems pretty straightforward.
The term ‘centralized exchange’ can be confusing. After all, digital currencies are intended as a decentralized alternative to other market investments. Just how can a decentralized currency have a centralized operator? The answer is crucial to the cryptocurrency industry. This is because a centralized exchange introduces a third party to moderate transactions, as in a bank. Through this, the exchange remains centralized.
A Brief Review of a Few Regulated Exchanges
Cryptocurrencies have numerous centralized exchanges. Here are a few to consider.
- IO is a regulated, secure, and licensed cryptocurrency exchange, supporting over 100 cryptocurrencies, including Ethereum, Bitcoin, and others. Experienced traders and investors are welcome with this platform.
- Bityard is a legitimate and secure trading platform when reviewed. It is suitable for beginners and experienced investors. The minimum investment is $2 and it is available in over 150 countries.
- Bitmart offers thousands of cryptocurrencies in over 180 countries. It offers industry-leading services. However, hackers did steal $196m from Bitmart in December 2021.
- SwyftX has over 300,000 users, covering Ethereum and many other cryptocurrencies. It has a high level of regulation and security.
Benefits and Drawbacks
There are advantages and disadvantages to this. However, it can be a matter of perspective. For example, centralized exchanges offer vastly more secure transactions. The security offered by the middle man is easily comparable to the safeguarding of a bank.
By monitoring transactions, centralized exchanges are able to guarantee the safety of all investments. What’s more, countless cryptocurrency investors lose access to their holdings, simply by forgetting the key to their digital wallet. With a centralized exchange, the third party will ensure that this will never happen again.
However, by using a centralized exchange, the investor is arguably sacrificing some of their financial freedom. One of the main appeals of cryptocurrencies is the fact that they are decentralized. As such, this kind of digital trading is not usually subject to the same restrictions as that of most markets. This is one of the key reasons for the surging popularity of cryptocurrencies in digital trading.
Of course, this lack of centralized restriction also makes trading in cryptocurrencies potentially risky. Trading in cryptocurrencies is highly speculative. Many investors have learned this the hard way.
No exchange is completely invulnerable to malicious activity. This should be remembered even when using a secure and centralized exchange. There are new exchanges coming into existence all the time. This can make it difficult to find one to trust, which offers high levels of security.
On the other hand, there are so many to choose from, that their success can often be measured by trading volume. As such, it becomes easier to locate a reliable centralized exchange from the many on offer.
Why is Trading Volume Important?
There are several reasons why trading volume is important for the success of any kind of trading exchange. For one thing, trading volume directly affects market stability. Whether an exchange is successful or not depends on many factors. However, trading volume is perhaps the most important. This goes for both centralized and decentralized exchanges. The reason is simple. If the exchange is trading at high levels, its stability will also be high.
With increased trading volume, comes decreased possibilities for market manipulation. This lowers the overall volatility of trading with that exchange.
Transactions in any kind of exchange take time to process. At the same time, cryptocurrencies are in constant fluctuation. Therefore, they can be volatile. Values of a given token or coin can rise and fall within the time it takes to process an investment or transaction. From the initiation of the transaction to its completion, the value may have fallen. If an exchange has a high trading volume, this process is likely to be shorter. Another factor in processing speed is security. Centralized exchanges offer higher security levels, so their processing times are also likely to be faster. This is one more advantage they have to offer.
How They Compare Against Decentralized Operators
Whichever way we look at them, centralized and decentralized exchanges are different. This is due to the key presence of a regulating third party. As has already been mentioned, this opposes one of the main appeals of digital trading in cryptocurrencies.
However, it also provides significantly greater levels of security. It can also result in more stable transactions and less overall volatility. This trading environment is therefore appealing due to these factors.
Decentralized exchanges create what is known as a ‘trustless‘ environment. All exchanges within this environment are peer-to-peer and unmoderated by any kind of outside user. The absence of a third party means that investors rely only on their own wits and each other.
An escrow service never holds any assets in a decentralized exchange. Hence, all transactions are subject to smart contracts and atomic swaps. This is how investors complete their transactions in a decentralized exchange. Presently, decentralized exchanges are less prevalent than centralized ones. However, they are always increasing. One day they may even overtake centralized exchanges.