Investors can trade crypto cryptocurrencies on a centralized exchange, which is a centralized body that facilitates transactions between two parties. These bodies work in the same way as banks and traditional stock exchanges, acting as intermediaries where users can deposit their funds and buy or sell different digital assets.<\/p>\n
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In a centralized exchange, all the operations are handled by a central authority. Thus, in addition to facilitating the exchange of digital assets, centralized exchanges also act as custodians of digital assets – providing a place for users to store their cryptocurrencies.<\/p>\n
Here are the listed key characteristics of a centralized exchange:<\/p>\n
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- They are centrally controlled –<\/strong> A single authority oversees the complete operation of a CEX, including infrastructure, security, and transactions.<\/li>\n
- They offer order books – <\/strong>Centralized exchanges offer order books that match buyers and sellers to create a liquid market. It also allows users to place a limit on their buy\/sell order and provide them with additional features, such as insurance.<\/li>\n
- They are regulated – <\/strong>Since most cryptocurrency exchanges deal with real money, they have to be regulated according to the Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. That means users need to provide their KYC details to the CEX before using its services.<\/li>\n
- They offer custodial wallets – <\/strong>Since the onus of securing an investor’s assets falls on a centralized exchange, it also offers custodial wallets. Crypto brokers such as eToro, for instance, provide mobile wallets that secure an investor’s assets and help them buy and sell crypto.<\/li>\n
- Trading Fee – <\/strong>A Centralized Exchange charges a transaction fee. The transaction fee is charged per trade, but it varies depending on factors like order type and trading volume.<\/li>\n<\/ol>\n
What Are The Pros and Cons of a CEX – At A Glance<\/strong><\/h2>\n
Listed below are the pros and cons of a centralized exchange at a glance:<\/p>\n
\n\nPros:<\/strong>
\n\n- \n
- <\/i> Offers a user-friendly interface<\/li>\n
- <\/i> Higher liquidity when compared to decentralized exchanges (DEX<\/a>)<\/li>\n
- <\/i> Suitable for risk-averse investors looking for legit intermediaries<\/li>\n
- <\/i> Offers custodian services<\/li>\n
- <\/i> Many exchanges offer insurance services<\/li>\n
- <\/i> Offers a wide array of investing tools<\/li>\n
- <\/i> Isn’t subject to the risks of Automated Market Makers (AMMs)<\/li>\n<\/ul>\n<\/div><\/div><\/div>
\nCons:<\/strong>
\n\n- \n
- <\/i> Users have no control over their wallet keys<\/li>\n
- <\/i> Security issues<\/li>\n
- <\/i> Subject to intense regulatory scrutiny<\/li>\n
- <\/i> Prone to unethical business practices<\/li>\n<\/ul>\n<\/div><\/div><\/div><\/div><\/div><\/div>\n
Visit The Leading CEX of 2024<\/strong><\/span><\/a>\n<\/p>
Benefits of Trading on a Centralized Exchange<\/strong><\/h2>\n
Here is a more comprehensive look into the benefits of trading on a centralized exchange.<\/p>\n
Offers a user-friendly interface<\/strong><\/h3>\n
Most centralized exchanges are user-friendly. Since they are private organizations, they focus on providing good services, which include providing a UI that is suitable for beginners. For instance, trading on eToro<\/a> has multiple perks. Not only is the signup process easy, but buying and selling crypto assets, too, is a matter of some clicks. The same goes for platforms like OKX. The world’s second-biggest cryptocurrency exchange by market capitalization provides a host of tools and tutorials to make its interface more user-friendly.<\/p>\n
This factor makes people more receptive to adopting the crypto economy. sa<\/p>\n
Higher liquidity when compared to decentralized exchanges (DEX)<\/strong><\/h3>\n
Liquidity<\/a> refers to how easily one can buy and sell a crypto asset without impacting the wider value of the prevailing asset. For instance, if a customer makes a whale move through a cryptocurrency exchange, selling many crypto assets of the same kind at the same time, it can adversely impact that asset’s value. With centralized exchanges, however, the liquidity is higher, which means users can easily trade an asset without impinging on its value.<\/p>\n
That makes centralized exchanges a good option for those looking to invest in major altcoins<\/a>.<\/p>\n
Suitable for Risk-Averse Investors looking for Legit Intermediaries<\/strong><\/h3>\n
Most entrants to the crypto space look for the best cryptocurrency exchanges<\/a> when start trading crypto. And the reason they pursue it is because they want to avert some of the risks of crypto trading by holding an exchange accountable to a degree – at least when securing the assets is concerned.<\/p>\n
Offers custodian services <\/strong><\/h3>\n
While holding cryptocurrencies in your own hard wallet is more secure, it may not be an optimal option for the entrants of the space. This is why centralized exchanges offer custodian services, allowing one to store their digital assets securely. Furthermore, some cryptocurrency exchanges, such as OKX, put a certain portion of the assets inside cold storage, preventing them from being vulnerable to digital threats.<\/p>\n
Many Exchanges offer Insurance Services<\/strong><\/h3>\n
While cryptocurrency exchanges have robust security systems built in place, they are still vulnerable. Even Binance, the largest cryptocurrency exchange by market capitalization, was hacked in 2022<\/a>, losing $500 million in the process. That is why these exchanges have insurance funds to secure users’ assets.<\/p>\n
Other platforms, like OKX, have used measures like these to prevent losing users’ assets.<\/p>\n
Offers a Wide Array of Investing Tools<\/strong><\/h3>\n
Along with facilitating the buying and selling of cryptocurrencies, centralized exchanges also help people trade perpetual contracts, derivatives, spot and margin trading, and other services. Additionally, to help traders make informed investment decisions, these bodies offer market analysis reports and charting tools.<\/p>\n
For instance, with OKX, not only can investors get buy and sell crypto, but they can also discover markets and opportunities. The platform even goes so far as to provide copy trading facilities, as well as loan programs.<\/p>\n
P2B also offers similar services. To learn more, read our P2B exchange review<\/a>.<\/p>\n
Isn’t subject to the risks of Automated Market Makers<\/strong><\/h3>\n
Decentralized exchanges<\/a> rely on Automated Market Makers to maintain their liquidity. But if an AMM doesn’t have an efficient liquidity pool, it can have a negative impact on an asset’s price, leading to capital inefficiency and impermanent loss.<\/p>\n
Centralized exchanges, however, rely on an extensive pool of buyers and sellers to maintain their liquidity.<\/p>\n
Also, check out our guide listing the best DEX cryptos to buy<\/a>.<\/p>\n
Drawbacks of Centralized Exchanges<\/strong><\/h2>\n
Listed below are the drawbacks of trading on a centralized exchange:<\/p>\n
Users have no control over their wallet keys<\/strong><\/h3>\n
The most prominent issue that users face with centralized exchange is the lack of control they have over their wallet keys. With no direct access to their assets, investors can incur massive losses if the exchange abruptly shuts down.<\/p>\n
During the FTX collapse, most users lost their stored assets. It was reported by the FTX Bankruptcy team that the exchange owes $8.7 billion to its customers.<\/p>\n
Security issues<\/strong><\/h3>\n
Even though most centralized exchanges have robust security measures in place, most of them have proven lacking in the past. There have been many high-profile hacks that have cost billions of dollars worth of losses to the crypto space. These incidences don’t seem to be slowing down.<\/p>\n
In 2022 alone, multiple cryptocurrency exchanges, including Crypto.com and Binance, had to deal with their systems being compromised and loss of assets.<\/p>\n
Subject to intense regulatory scrutiny<\/strong><\/h3>\n
Centralized exchanges are controlled by centralized authorities that are subject to intense regulatory scrutiny. That means many of the actions that an exchange might need to take may be perceived as unfair to new users.<\/p>\n
Most often, these regulations include restrictions that limit the assets exchanges can support. For instance, SEC marked over 68 cryptocurrencies as securities, leading many cryptocurrency exchanges to remove support for these assets.<\/p>\n
Also, SEC recently filed a lawsuit against Coinbase<\/a> for operating as an unregistered broker.<\/p>\n
It means that investors need to be more careful when selecting the right CEX for their needs.<\/p>\n
Prone to Unethical Practices<\/strong><\/h3>\n
Since profit is the primary goal of centralized cryptocurrency exchanges, there is nothing stopping them from adopting unethical business practices. Misrepresenting information and market data manipulation can be common for these exchanges if that means extracting more profits from their user base.<\/p>\n
In FTX’s case, it was revealed that even though the official terms stated that the exchange wouldn’t be using user funds to conduct any business, they were used to keep Alameda Research afloat.<\/p>\n
How to Start Trading on a Centralized Exchange?<\/strong><\/h2>\n
Here is the step-by-step guide to start trading on a centralized exchange. For reference, we are using the second biggest cryptocurrency exchange by market capitalization – OKX:<\/p>\n
Step 1 – Go to OKX<\/strong><\/h3>\n
- <\/i> Security issues<\/li>\n
- <\/i> Higher liquidity when compared to decentralized exchanges (DEX<\/a>)<\/li>\n
- They offer order books – <\/strong>Centralized exchanges offer order books that match buyers and sellers to create a liquid market. It also allows users to place a limit on their buy\/sell order and provide them with additional features, such as insurance.<\/li>\n
![\"Go](\"https:\/\/insidebitcoins.com\/wp-content\/uploads\/2023\/07\/Go-to-OKX.png\")
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