Pros and cons of trading on a centralized cryptocurrency exchange

Now that we all are waiting for the bitcoin halving to happen and influence the price of BTC, it is specifically important to choose a good trading platform. Therefore, those, who only starting to deal with cryptocurrency trading are likely to appreciate this article.

Cryptocurrency trading can be conducted on two types of bitcoin exchanges — on the centralized and on the decentralized ones. Let’s take a look at the differences between the two before we proceed to discuss the main advantages and disadvantages of the centralized ones. Read on!

What are the differences between centralized and decentralized exchanges?

Centralization is usually frowned upon among crypto owners. Most of the cryptocurrencies out there, including Bitcoin, are using a distributed ledger, meaning there’s no central authority governing the rules.

To paint a better picture, we must use national banks as an example of a centralized body governing the rules of fiat currencies. That cannot happen with cryptos.

But despite cryptos being decentralized, the majority of exchanges are centralized. What does that mean?

Essentially, exchanges that used for buying and trading cryptocurrencies — at least the most popular ones — are owned and operated by one company and, ultimately, one or several people. In other words, they are centralized in every possible manner.

On the other hand, decentralized exchanges are not operated by an individual or organization. Similar to cryptocurrencies, they operate in a decentralized manner, with no central authority, allowing P2P trading of cryptocurrencies.

Now that this is clear, let’s take a look at how centralized exchanges operate in comparison to the decentralized ones. Read on!

Advantages of Centralized Exchanges

First of all, if you’re new to the world of crypto trading, you should go for a centralized exchange, as they are much more user-friendly.

Some exchanges, such as CEX.IO, actually built their user interface around welcoming newcomers to the crypto sphere. Therefore, once you decide to buy your first cryptocurrency, you will be able to do that with a simple and straightforward signup process that will take just a couple of minutes of your life.

On the other hand, decentralized exchanges don’t have such a welcoming user interface. However, sometimes highly-experienced traders prefer using DEX to CEX, as they don’t have issues with understanding some of the more complicated concepts related to cryptocurrency trading.

Therefore, if you’re new to the world of cryptos, choosing a centralized exchange is a better option for starters. Once you get comfortable with trading options, you can consider registering on a DEX.

Another essential advantage of centralized exchanges is the use of fiat currencies. In other words, you cannot use dollars or any other type of fiat money on decentralized platforms — they operate only with cryptocurrencies.

If you don’t have a cryptocurrency and want to buy some, the only logical answer is to seek a centralized exchange that accepts fiat (most of CEX exchanges do).

Finally, centralized exchanges have a massive trade volume. In other words, the majority of traders use them, meaning you are likely to make a successful transaction when trading. On the other hand, many DEX platforms are struggling with volume, meaning you might have trouble buying or selling crypto from time to time —- especially at the less popular.

Disadvantages of Centralized Exchanges

Let’s state the obvious — the sheer fact that the exchange is centralized is considered to be a disadvantage. Simply put, there’s an extra step in the transaction process as opposed to DEX platforms.

If you send fiat money to someone using a bank, the transaction needs to be reviewed and allowed by the bank, increasing the cost and efficiency of that transaction. If you send cryptocurrency to another person, there are no middlemen to slow down the process.

The same goes for centralized crypto exchanges — they present that one additional step in the process. On the other hand, decentralized exchanges allow you to directly exchange cryptocurrencies with someone, with the exchange being just a tool that facilitates it.

Theoretically, this means that all transactions are faster and fees are lower. In real life, decentralized exchanges can present a problem if there’s not enough traffic. However, trading popular cryptocurrencies on decent DEX’s can be actually pretty convenient.

Centralized exchanges are also considered more vulnerable to cyber attacks, as there have been cases of such platforms being hacked, with millions of dollars in cryptocurrencies stolen from them. However, professionals from the industry are working hard on improving the security and safety measures on centralized exchanges to avoid unpleasant scenarios.

Finally, the number of cryptocurrencies available in centralized exchanges is limited, as opposed to DEX’s, which usually offer hundreds of cryptocurrencies for trading. Many people don’t consider this a significant issue as most traders only focus on important cryptocurrencies, such as Bitcoin, Ethereum, and others. However, if you’re interested in trading some rare cryptos, then the likelihood of finding them on DEX is higher compared to CEX platforms.

Conclusion: What should you choose?

Simply put, decentralized exchanges might be a slightly better option right now if you’re an experienced trader. They offer more options and are overall more reliable. Yet, there’s one huge issue with them that stands in the way — they’re struggling with adoption.

In other words, the main obstacle to using them is that 99% of all cryptocurrency transactions are taking place on their centralized counterparts. Therefore, if you’re looking to trade actively and in big volumes, you don’t really have an alternative, as only CEX platforms will enable that.

Also, if you’re new to the world of crypto trading, you should definitely aim for a user-friendly centralized exchange with good trading volume. They will help you understand how everything works and make you more experienced. Moreover, you can use them to deposit your fiat money and convert it for a cryptocurrency of your choice.

After you learn some more complex trading strategies and become a professional trader, you can ultimately decide whether DEX platforms are worth your time or your money. However, it’s a process that takes time, so you should take things slowly before using a decentralized exchange.