The term cryptocurrency is quite new to many people. The crypto industry only came into existence in January 2009 with Bitcoin, so the industry is still in its infancy.
Cryptocurrency exchanges are one of the biggest businesses in the crypto space, with significant profits every day. In addition, new concepts like decentralized exchanges and derivative exchanges are emerging almost every day.
In this article, we will discuss the types of cryptocurrency exchanges, comparing decentralized exchanges to centralized ones to help you understand their differences.
Buying and trading cryptocurrencies
In order to trade cryptocurrencies, traders need to buy cryptocurrencies. This is why crypto exchanges are so needed in this industry. They allow users to buy, sell, and trade their cryptocurrencies instantly, and some of them act as fiat gateways, too, so you can use your bank account or credit card to buy cryptocurrencies.
Crypto-exchange businesses have various approaches. There are exchanges that focus on ease for the customer, others that offer low trading fees, some that educate their customers from the start, and yet others geared towards professional traders.
This article will cover the ways in which cryptocurrencies like Bitcoin can be purchased using a Bitcoin wallet and traded. Several methods can be used to accomplish this.
1. A classic exchange procedure
In a cryptocurrency exchange, the classic process is similar to that of a stock exchange in terms of trading. When you exchange fiat money or another crypto asset, you can either place a limit order that would go to an orderbook and wait until matched or you can place a market order that will be instantly matched with buyers and sellers requests already available in the depth of market (DOM) of the exchange.
2. The peer-to-peer exchange of cryptocurrencies
The usage of p2p exchanges is not limited to cryptocurrencies; traditional markets are also very popular with these exchanges. Buying or selling assets via Over-the-Counter desks (OTC) is done confidentially from other individuals or firms, but through its representatives. It does not affect the price of the underlying asset directly and does not have an order book. As an example, LocalBitcoins.com is a website where supply meets demand, or peer-to-peer trading. Most transactions occur without a middleman, but some OTC trading desks may be used as well, where they charge a fee for their services. A major function of OTC is to handle large quantities of crypto, which might have influenced the price of the traded asset. Cryptocurrency miners, large venture capital companies and hedge funds are usually the users of this service.
3. The CFD trading and brokers
Brokers allow buyers and sellers to find a counterparty for their transaction, which may be the broker himself. A middleman (broker) will receive a fee from the trade, but will ensure the safety and security of both parties. With a broker, you can also trade CFDs, which can be used to trade almost all types of assets, from stocks to cryptocurrencies. As opposed to traditional exchanges, CFD trading does not involve ownership of any physical asset.
4. The derivatives exchange
The last option is to use derivatives exchanges. What is a derivatives exchange, and how does it benefit users? Investing in derivatives involves trading the price of the underlying asset, so you can take advantage of various benefits to maximize your profits. The high leverage that is possible with instruments like futures and perpetual swaps is one of the biggest advantages of derivatives exchanges.
Cryptocurrency exchange types
The centralized exchanges
The most well-known and traditional crypto exchange is the CEX. Traders can trade crypto-to-crypto as well as fiat-to-crypto, as they are governed by a company that offers both gateways.
Trades can be made using the order books, as well as some technical analysis tools on some advanced exchanges.
One of the biggest advantages of CEX is its ease of use, great user interface, and quick response. Some of them allow you to trade simply by registering with your email address, writing down your password, and logging in.
The decentralized exchanges
It is different from CEX because there is no central point of failure, no company is responsible for the assets. The smart contract and decentralized applications automate the transactions and trades compared with traditional CEX.
Smart contracts are much more secure this way because a security breach is impossible if they are well written.
Cryptocurrency hybrid exchanges
In essence, it is a kind of trading which takes advantage of both CEX and DEX. As a result, you can find fast transaction speeds with centralized platforms while still retaining privacy and security.
A hybrid type is a new generation of crypto trading marketplaces, but they are still in the early stages of development. It is the Nash exchange and Qurrex exchange that is the most popular type of hybrid exchange.
