Do You Need an Exchange to Trade Cryptocurrencies?
A crypto exchange is a platform on which you can buy and sell cryptocurrencies. You can trade crypto – converting Bitcoin to Litecoin, for example – or you can buy crypto using regular currency, like the U.S. Dollar. So, in order to trade cryptocurrency, you do need an exchange. Because without an account on an exchange platform, you can’t access your digital assets and currencies to buy and sell.
Types of Exchange Platforms & Their Differences: Centralized vs. Decentralized
Centralized cryptocurrency exchanges, otherwise known as a broker, act as a third-party between a buyer and a seller. Since they are controlled by a company, these types of exchanges tend to be more reliable. Whereas decentralized cryptocurrency exchanges, otherwise known as DEX, allow users to trade and transact peer-to-peer without a broker in the mix.
Advantages & Disadvantages of Centralized vs. Decentralized:
Centralized exchanges are user-friendly and reliable. These types of exchanges are great for beginners. With centralized exchanges, you can have everything at the click of a button, with the broker applications and websites that allow you to view your account balances and transactions. It’s the less-risky route, however, it still comes with a number of disadvantages.
Disadvantages of centralized trading could be, hacking risks and transaction fees. While using a centralized exchange might mean your cryptocurrencies are operated by companies that are responsible for the holdings, this doesn’t mean there aren’t risks involved. Your account might be a target if you’re holding billions of dollars worth of Bitcoin. Another disadvantage, especially if you’re holding large amounts is the transaction fees. These are usually high on centralized exchanges due to the service and convenience they provide.
Decentralized exchanges come with many advantages and disadvantages too. These types of exchanges aim to mitigate hacking risk and prevent market manipulation. Decentralized exchanges cut out the middle man, which means you do not need to transfer your assets to a third-party company that is at risk of being hacked. In addition, the nature of peer-to-peer exchanges prevents market manipulation protecting users from fake trading. While this might all sound great, decentralized exchanges come with risks too.
The disadvantages of decentralized exchanges are complexity and lack of fiat payments. This type of exchange is one that requires a tad more responsibility, as you are the one managing your own assets and accounts. In addition to this, Decentralized exchanges do not allow for the trading of fiat currencies for digital ones, making them less convenient for users that do not already hold cryptocurrencies. Decentralized exchanges might not be for you if you are a beginner trader.
Is Cryptocurrency Trading Risky?
The short answer is yes. Cryptocurrency trading is risky because the currency itself is so volatile. Exchanges reflect the current market prices of the cryptocurrencies they offer. The currency is speculative and high-risk, and it’s not uncommon for the value to plummet hundreds of dollars at the drop of a hat. It’s also not uncommon for it to suddenly skyrocket in value. Another major risk is crypto cybercrime. There is little to no regulation of this trading field, and cryptocurrency is not backed by the government. It doesn’t go through a bank, nor will the SEC reimburse you if you lose all your money. Crypto-related cybercrime ranges from mishandling private information to hackers raiding and depleting users’ cryptocurrency accounts.
All in all, trading crypto can come at a risk. So, make sure you do your research and do it well.