Centralized cryptocurrency exchanges: advantages and disadvantages
Centralized exchanges are an indispensable tool for working with cryptocurrencies for each user. But many do not know why it is worth working with them more carefully and what risks there may be when interacting with them.
What are centralized exchanges?
Centralized crypto exchanges (abbreviation CEX from English Centralized Exchange ) are specialized platforms for buying and selling cryptocurrencies. All this happens within the framework of the service itself. The most important feature of a centralized exchange is the way it functions. Centralized exchanges are created and controlled by a certain group of people. This is how any exchanges work, even outside the cryptocurrency market. There is a large team or organization that is fully responsible for the operation of such exchanges. Hence the name – centralized. This means that the management core of the exchange is 1 center that manages absolutely everything.
How CEXs Work
Centralized crypto exchanges work very simply. You register on their website, go through the verification procedure (you can read more about verification procedures in one of my articles ). Next, replenish the balance of your exchange crypto wallet with a cryptocurrency using the exchange service from fiat money on your bank card to any cryptocurrency directly on the exchange website. Also, if you already have a cryptocurrency somewhere, you can simply send it to your exchange account.
After all these manipulations, you can search for the trading pair you need (for example, Bitcoin to USDT stablecoin) and buy Bitcoin or any other cryptocurrency for your dollars. The most important thing is that the trading pair you are interested in exists on this exchange.
Advantages of centralized exchanges
CEX exchanges are quite easy to use and are well suited for both beginners to get acquainted with the basics of crypto trading and professionals. The obvious advantages include the following.
- Interaction with the platform is simpler and more understandable for a beginner than decentralized exchanges.
- There is an important additional option for earning money – futures trading or trading with leverage.
- You do not need to perform any additional manipulations to exchange cryptocurrency from one blockchain to another (for example, bitcoin for ether or vice versa). This can be done in one click if there is a trading pair.
- The ability to place an order in advance and buy or sell cryptocurrency at the price you set. As soon as the price reaches the level you need, the transaction will be automatically completed.
- Popular platforms often have much more liquidity than decentralized exchanges.
- Protection against scam coins and projects. If one or another altcoin got on a centralized exchange (especially a popular one), you can already be sure that this coin has passed a serious check by the exchange, and a lot of money has been paid for the listing.
- Almost zero commission is taken for any exchange.
Centralized Cryptocurrency Exchanges: Cons
In general, centralized exchanges are much more convenient and more variable than their decentralized competitors, which I will talk about in one of the following articles . However, they have several very significant disadvantages that may discourage you from using such sites. Let’s name some of them.
- Your funds do not belong to you. The main disadvantage of all CEX exchanges is that your funds are stored on the exchange crypto wallet. While the money is on the exchange, it simply does not belong to you. Of course, at any time you can withdraw them to your personal wallets, but where is the 100% guarantee that the exchange will not close the withdrawal of funds? There is also no guarantee that at one moment the exchange will not go bankrupt or simply close and run away from the market with all the funds.
If we are talking about the top and most popular exchanges, then the risk that this will happen is practically zero. But I want to emphasize that it is still present! Therefore, never keep large amounts of funds in one exchange account. Don’t use your exchange wallet for storage and diversify your funds!
- Risk of losing your funds. It is not uncommon for hot wallets of crypto exchanges to be hacked by hackers. You won’t be able to protect yourself from this either. Naturally, hackers can break into your wallet and steal your funds when using decentralized platforms. But if in that case the security of your wallet depends solely on your actions, then in the case of CEX, nothing depends on you at all. If the exchange was hacked, you are not to blame in any way, but your funds will still be lost. For example, last month there was a big hack of the major Bitmart exchange. About $150 million was stolen.
- Mandatory identity verification. For someone, passing KYC is an additional guarantee of the safety of their account and funds. But for many, mandatory verification on the exchange is deanonymization. One of the key advantages of cryptocurrency is anonymity. Therefore, many are unwilling to reveal their identity so that someone can trace the flow of his funds or use confidential data against him. There is also the risk of “draining” your personal data from the exchange. I wrote more about the risks of KYC in one of my previous articles.
As you can see, such exchanges have fewer minuses than pluses. However, their danger can overlap all the advantages that I have listed.
Examples of CEX exchanges
In order not to be unfounded, I will now demonstrate some of the most popular options for cryptocurrency exchanges. This is by no means a recommendation for use, but rather an informative list of platforms that have a history in the cryptocurrency market.
- Binance. The largest, most popular and recognizable exchange of the entire cryptocurrency sector. The safest, most convenient to use. There is the largest number of trading pairs, which is undoubtedly a plus for any trader.
Who are centralized cryptocurrency exchanges suitable for ?
Centralized exchanges are easy to use, have wide functionality, user-friendly interface, some have licenses and legal jurisdiction for trading. Based on these advantages, this type of exchange is suitable primarily for beginners. They need to feel, try everything with their own hands, learn how to trade, place orders. No need to bother about sending cryptocurrencies to different blockchains and literally pay a huge commission for every action. In addition, such exchanges can be used by professionals who trade futures, simply because CEX exchanges provide such an opportunity.
However, despite all the advantages, one should not forget that such exchanges are not safe. Be prepared for the fact that your funds can be stolen by hackers or the exchange itself. You should not use one exchange on an ongoing basis, and generally keep any funds on them. I would recommend using such exchanges, but very carefully, and only if you are not deterred by the fact that you will have to provide your personal data for exchange verification