Beginner’s Guide to the Types of Cryptocurrency Exchanges

Sudarshan M

@Sum

BinanceCoinbaseCrypto ExchangesCrypto TradingExchangesTrading

With the constant surge in cryptocurrencies and their applications, investors and traders demand Cryptocurrency Exchanges perform trading. Therefore, Crypto Exchanges play a vital role in the development of the blockchain industry. Simply put, a Cryptocurrency Exchange allows investors to trade instantly and buy or sell cryptocurrencies.

For investors looking to enter the cryptocurrency space, a centralized exchange is still the most common means of doing so. But the list doesn’t just end there. One must know about the other options available to gain complete knowledge of the ecosystem. Therefore, when selecting an exchange, it’s essential to keep in mind the host of factors that will impact user experience, including which pairs are traded, how high the trading volume is, the security measures adopted by exchanges to protect their customers, and most importantly, the risk involved in trading with the particular platform.

Although many cryptocurrency exchange platforms are currently available, it is evident that most of them follow the standard model and protocol that offers a limited and frustrating trading experience to traders who would love to get more out of exchanges. So let us take a brief look at the types of exchanges out there and how one can decide on what suits them the best:

Based on Ownership

Centralized – CEX

The main essence of a centralized exchange is that it is the intermediary between user traders’ two roles (taker and maker). As a result, centralized exchanges currently form the cryptocurrency ecosystem’s backbone by bringing most, if not all, traction.

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This exchange obtains a fee from each transaction (usually from 0.1% to 1.5%). The broker company controls the entire system, infrastructure, and platform. In the case of hacker attacks, DDoS attacks, or other unauthorized access, the exchange will suspend its work to secure user funds. All money is stored in the accounts of crypto-exchange, and in fact, it controls its activity, market, and assets.

The benefit of knowing who you are is that you can prove you are the owner of an account in the event of losing access or some error that requires issue resolution. The benefit of not knowing who you are is that you can use your money without losing privacy and use systems not available in your jurisdiction. It is the combination of liquidity and custodianship that means faster execution.

Centralized Exchanges Characteristics:

• High Volume
• High Liquidity
• Low Transparency
• Risk of counterparty
• Indirect ownership of funds
• Not anonymous

Some prevalent centralized exchanges include Coinbase, Binance, Bittrex, Bitfinex, etc.

Decentralized – DEX

A decentralized exchange (DEX) is a cryptocurrency exchange that operates decentralized, i.e., without a central authority. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies. In a traditional centralized exchange, the platform ensures that each buyer is matched with a seller on a first-come-first-serve basis. Centralized exchanges provide efficiency in exchange for privacy. On a decentralized exchange, one can rest assured that confidentiality is maintained as they control their funds and data. Still, sometimes, it gives up much of the efficiency and liquidity that most centralized exchanges boast.

DEXs do not hold cryptocurrencies or have a central ledger. This bars DEXs from offering efficient latency to motivate more prominent investors to participate in these markets to provide more liquidity. Generally, DEXs have lower liquidity than CEXs because of lower users’ adoption and, thus, lower trades occurring throughout the platform.

DEX’s prDEXe is the non-custodial aspect of trading crypto. Of course, you never have to leave your tokens sitting on an exchange, but it allows a smoother trading experience comparable to a centralized exchange.

Centralized exchange fees are very high but provide more robust tools and fast confirmation times. A decentralized exchange will be much cheaper in comparison, allowing trades that would potentially cost $1000s to be executed for pennies. The downside is that trades on DEX will not be confirmed immediately, and usually, the service will not offer the same toolset that a centralized exchange would.

Decentralized Exchanges Characteristics:

• Transparent to everyone
• No Counterparty Risk
• Liquidity depends on the exchange’s reputation.
• Direct ownership of funds
• Anonymous

Some prevalent decentralized exchanges include dy/dx, Ddex, and Next. Exchange, etc.

Hybrid

Hybrid exchanges are gaining popularity and are known to be the next-generation crypto trading marketplace. As the word “hybrid” itself d, it combines both licensed and decentralized cryptocurrency exchange (CEX+DEX=HEX). The hybrid exchange philosophy builds on the strengths of decentralized and centralized exchanges. Thus, the hybrid cryptocurrency exchange will be based on a centralized exchange platform’s liquidity and functionality and a decentralized exchange platform’s security and confidentiality. Hybrid Cryptocurrency Exchange is one in which you can allow a user to trade with and without middleman authority. You can decide when your exchange must be a CEX and when to be a DEX.

Because it unites the advantages of a centralized exchange, such as cooperation with prominent investors and the trust of many users, with the benefits of a decentralized exchange, such as the absence of a higher authority and reliable storage.

Bitdeal – Cryptocurrency Exchange Development Company

Bitdeal is a leading cryptocurrency exchange development company known for providing the best cryptocurrency exchange script to start your own exchange business.

This is how we choose hybrid cryptocurrency exchange development, we believe this will be the future of cryptocurrency exchanges after dex. With 120+ expert developer team, bitdeal can derive you a unique development strategy to build hi-secured hybrid cryptocurrency exchange website.

Binance DEX is the most famous hybrid exchange as of now. But proposals for dozens more are on the way.

Based on Trade

Regular 

Any seasoned trader or investor would know that a base asset is just the surface of the investing landscape. As the asset’s demand increases, the innovation in providing products linked to the asset also increases.

Regular exchanges such as Coinbase allow investors to come, deposit funds and buy or sell the crypto asset of their choice. They connect buyers to sellers, execute the trade, and facilitate the exchange of funds immediately. Exchanges with basic trading functionalities such as buy/sell, daily charts, order books, etc., are enough for any retail and infrequent investor to decide and execute their strategies.

Regular exchanges form the cryptocurrency’s backbone as they are a gateway towards other diverse products. Regular asset facilitates the base asset trade for their market value and connects thousands of buyers with sellers. Both centralized and decentralized exchanges can be conveniently configured to function as regular exchanges.

Specialized

Exchanges build upon the traditional base asset exchange by providing an innovative product that leverages the base asset from Specialized exchanges. Their products may include derivatives such as futures, options, leveraged trading, etc. Day Traders usually prefer exchanges that integrate innovative products on top of the regular exchange activities, allowing them to make a more significant profit based on their reasoning.

By proving the facilities of a traditional exchange and including specialized products, Binance, BitMEX, Bityard, and others bring huge interest from technical and institutional investors.

Specialized exchanges can be enriching and extremely risky at the same time, depending on your trading methods and also your competency. One of the most common features is margin trading. However, even though margin trading is the riskiest, it is also an enormously rewarding form of crypto trading.

Margin trading involves using the deposit to take on leverage with a more significant risk to pull in a greater reward. Leverage uses a deposit, known as a margin, to provide you with increased exposure. Essentially, you’re putting down a fraction of the total value of your trade. Leveraged products allow traders to gain exposure to major cryptocurrencies, such as Bitcoin, Ethereum, and others, without tying up much capital. For example, it is called leveraged margin trading if you have $100 and you leverage (borrow) $1000 on this existing $100 to trade.

The BitMEX or Bitcoin Mercantile Exchange is the most famous specialized exchange in the crypto sector. It provides leveraged products for 6+ cryptocurrencies and allows leverage up to 200x the deposit amount.

Based on Acceptance

Fiat

A crypto exchange is an online website that provides a platform for buying, selling, or exchanging cryptocurrencies like bitcoin, ether, and litecoin for fiat money like USD, EUR, and GBP. A “fiat-to-crypto on-ramp” is a process that facilitates the conversion of government-issued fiat currency into a crypto-based currency. Centralized exchanges have the advantage of being the first interaction most people have with cryptocurrencies; they are only fiat-to-crypto on-ramps.

Fiat-based exchanges allow the conversion of sovereign currencies to be exchanged to cryptocurrencies to get exposure to the developing asset. As a result, fiat-based exchanges are among the most critical growth drivers as they allow new money to flow into the sector. For this reason, fiat exchanges get the highest traction as most retail investors first need to enter the industry and then move on to other platforms.

Most centralized exchanges, like Coinbase, Binance, Bittrex, function as fiat convertors. Some exchanges even accept credit cards to purchase cryptocurrencies, increasing liquidity and leverage.

Non-Fiat

Exchanges involved in the daily exchange of cryptocurrencies but do not include exchanging cryptocurrencies from or to Fiat currencies are non-fiat exchanges. Non-fiat exchanges are usually principled, abhorrent, and rigid. They offer little flexibility but are extremely helpful for anonymity. People who fully indulge in using cryptocurrencies and discourage conversion into fiat currencies prefer exchanges like this. Non-fiat exchanges involve greater security and prevent centralized entities or institutions from laying a claim by acting intermediaries. Even though most non-fiat exchanges are usually decentralized, quite a few are centralized.

Some decentralized exchanges that discourage fiat transfer are dy/dx, Ddex, and NextExchange.

For detailed reviews on some of the best exchanges out there, check below.

• Coinbase
• Binance
• Bittrex
• Gemini
• OKEx
• Huobi
• Kraken
• Poloniex

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Conclusion

When choosing a cryptocurrency exchange, it is essential to balance several considerations. This is because exchanges are different and have different ways of building security precautions, regulating users, building their network, and building a user experience.

There are more than 350+ established exchanges, with more on the way every day. Unfortunately, it cannot be easy to pinpoint the proper exchange for you in all this hassle.

It is not a clear-cut decision of which exchange structure is best to be used. You could be extremely comfortable managing your crypto key security but still want access to high-frequency algorithmic trading decisions that are only available using centralized exchanges. As the industry ventures forward, innovations in enabling personnel to buy and sell their cryptocurrencies are running at a rampant pace. It is up to the market players to decide their particular preferences. One would be comfortable with a centralized exchange that takes care of all technicalities, while another would enjoy learning the intricacies of decentralized exchanges.

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The best advice one could give is thorough and DYOR – Do Your Research. That’s the best possible strategy when deciding on the exchange of your choice.