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The popularity of cryptocurrency is causing investors to make a beeline for buying into the cryptocurrency boom. The trading activity in these markets has increased manifold in the past few years.
However, novice investors can find it difficult to understand how cryptocurrency is bought and sold. This is particularly important since there is more than one way to buy and sell crypto.
Traders often face the choice between centralized and decentralized exchanges when they first start investing in crypto. In this article, we will have a closer look at what centralized crypto exchanges are and we will also understand the pros and cons of investing via these exchanges.
Centralized cryptocurrency exchanges are private corporations that facilitate trading in cryptocurrencies. They provide a platform wherein investors can buy cryptocurrency using fiat currency.
Alternatively, they can also convert one type of cryptocurrency into another. These are licensed corporations that have a physical presence i.e., offices, employees, and other such infrastructure.
There are many advantages and disadvantages which need to be understood before deciding whether or not centralized exchanges are more preferable to decentralized ones. The details of these pros and cons have been listed below:
The cryptocurrency investors have faced their own fair share of scandals. Conservative investors want to ensure that they deal with a reputable intermediary to protect themselves against such scandals. This is where centralized exchanges are viewed in a favorable light.
Since these corporations have a physical presence and are regulated by the government, investors feel that they can avoid scandals by using the services of these exchanges.
For such entities, centralized exchanges are very important since they provide the only mechanism to invest in the cryptocurrency markets.
Also, centralized exchanges provide custodian services. This means that they have a specialized infrastructure to store digital currency. These exchanges provide digital vaults which are highly secure.
Some of these exchanges even provide services wherein the digital coins are stored offline in a special form of hardware. These services are very valuable for investors who are concerned with the security of their investment.
However, it offers peace of mind to investors who may be constantly worried about the possibility of digital attacks.
There are several disadvantages to using centralized exchanges as well. Some of them have been written below:
However, this also reduces the number of trading options. Reduced options also have a financial impact since most of the growth in the past few years has come from newer cryptocurrencies.
Centralized exchanges deal with a wide variety of regional and federal government agencies. The data at these exchanges may also be accessed by these agencies. These strict regulations are a deal-breaker for many investors who prefer privacy.
Up until now, there has not been any news of the bankruptcy of any exchange. However, there is always a possibility that this might happen in the future. Investors who use these centralized cryptocurrency exchanges run the risk of losing money as a result of such bankruptcies.
The reality is that centralized cryptocurrency exchanges provide some legitimacy to the trading of these digital currencies. In the absence of these exchanges, entering and exiting cryptocurrency markets can be fraught with risk and uncertainty.
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