CryptoMode will teach you how to choose a crypto exchange, what types exist, and explore their pros and cons.
A cryptocurrency exchange functions similarly to a stock exchange but trades crypto assets instead of traditional ones like stocks, forex, and commodities.
You need to know how to choose a crypto exchange there are two types:
1. Centralized exchanges (CEX).
2. Decentralized exchanges (DEX).
How Does CEX Differ From DEX?
Although both types of exchanges serve the same purpose of facilitating cryptocurrency trading, they have distinct differences.
A centralized exchange is a platform controlled by a third party, a company, or an individual. Examples of such platforms include Binance, Bybit, KuCoin, OKX, and others. The features of CEX include:
- Passing the Know Your Customer (KYC) process. Customers must provide their details (passport, proof of residence, etc.). This is because CEXs need to comply with local laws and regulations. Moreover, exchanges can – and often will – share data with tax authorities, for example. However, this can have its advantages. Some platforms offer crypto cards tied to your CEX balance that can be used to pay for purchases directly without withdrawing cryptocurrencies to fiat.
- CEX holds the keys. Centralized exchanges are hot wallets. While all crypto wallets have unique keys granting access to assets, in this case, the platform owns these keys rather than the client. As such, a user always needs the exchange’s permission to access and withdraw funds.
- Buy and sell cryptocurrency with fiat currency. Most centralized exchanges support several currencies, from the US dollar to the Turkish lira, simplifying the initial step for new customers to deposit funds into the exchange.
- High liquidity. It is a key feature of CEXs. They are more popular than DEXs due to their clear interface and similarity to stock exchanges, attracting a larger client base and producing high trading volumes. Higher liquidity facilitates faster and easier cryptocurrency sales.
- Large selection of cryptocurrencies. New crypto projects often seek listings on these platforms due to their extensive client base. Additionally, some centralized exchanges support projects even at the airdrop stage.
A decentralized exchange is a platform not controlled by a third party and operates on a non-custodial blockchain system. They also grant access to decentralized finance (DeFi). DEX features include:
- There is no requirement for KYC verification on DEXs, as they are not under the control of regulators. This allows for anonymous/pseudonymous cryptocurrency trading. However, the Commodity Futures Trading Commission (CFTC) conducted a significant investigation into DeFi and advocated for market regulation.
- Low liquidity. DEXs generally have lower trading volumes than CEXs. This can result in longer transaction times when buying or selling assets. One way of circumventing this is by adjusting the slippage settings, although that may result in unfavorable trading conditions. In addition, lower trading volumes can make DEXs more susceptible to price manipulation, as evidenced by the Dmail incident on PancakeSwap.
- A small selection of cryptocurrencies. However, on decentralized platforms, you can find coins that are not traded on centralized ones. This is often true for new currencies issued on popular networks like Ethereum, Solana, or BNB Chain.
- No fiat transactions. You cannot buy or sell cryptocurrency with fiat currency on DEXs. Instead, you’ll require stablecoins or other cryptocurrencies. You’ll need a crypto wallet with a coin balance to trade on decentralized platforms.
- Payment for gas. On a DEX, commissions can be lower than on a CEX because there is no third party between the traders. However, it is often necessary to pay for gas with the platform’s native token.
- Clients store their keys. DEXs operate as peer-to-peer systems, where the clients control transactions.
Which Crypto Exchange to Pick?
Centralized exchanges serve traders of all experience levels. These platforms are preferable for beginners in the crypto space for several reasons. First, regulated exchanges offer customer support services. Second, they have user-friendly interfaces that eliminate the need to understand blockchain mechanics. Third, they support fiat transactions, which simplifies the trading process.
However, there are points that all traders need to consider when choosing a centralized crypto exchange:
Step 1: Learn about security. This is the most important point. Since they hold customers ‘ wallet keys, centralized exchanges are prime targets for scammers. It’s vital to ascertain the platform’s security measures and the efficiency of its support team. Additionally, implementing a two-factor authentication system is essential to enhance account security.
Step 2: Make sure the platform supports your country of residence. Due to KYC regulations, certain centralized exchanges adhere to local regulatory guidelines and may restrict registration to citizens of certain countries. However, if you are a resident of another country, you may still be able to open an account.
Step 3: Determine the supported methods for funding your account. Typically, bank cards are accepted on all centralized exchanges. For more specific requests, such as purchasing Bitcoin with PayPal or SEPA transfers, it’s advisable to consult the platform’s website for clarification.
Step 4: Check the currencies supported by the exchange. A selection of major currencies like US dollars or euros is standard. If the exchange doesn’t support your currency, you can still fund your account through a foreign currency account in a bank. Alternatively, you can use a local currency bank account, but be aware that there may be a conversion fee if the exchange does not support it.
Step 5: Consider the cryptocurrencies offered by the exchange. Major coins are typically available on most platforms. However, if you’re interested in newer projects, analyze how quickly and frequently CEXs add new tokens. For instance, the meme coin Myro is traded on Bybit but is not available on Binance [as of February 21, 2024]
Step 6: Examine the trading instruments offered by the exchange. For experienced traders, exchanges provide futures, derivatives, and more options. However, clarifying the commissions and terms associated with these instruments is essential.
CEX: how to choose a crypto exchange by volume.Source: CoinGecko
Decentralized exchanges are better suited for experienced crypto traders since you need to possess a certain level of knowledge and understand the principles of DeFi. Additionally, it’s worth noting that DEX often lacks customer support services.
However, DEXs are suitable for traders seeking anonymous transactions, as they typically do not require KYC verification, and users may not even need to create an account.
What to consider when choosing a centralized crypto exchange?
Step 1: Check for a history of hacking and other fraudulent schemes. DEXs lack intermediaries and regulatory oversight, making resolving issues challenging in case of problems.
Step 2: Verify the list of supported crypto wallets. To transact on DEXs, you must connect your compatible wallet containing cryptocurrency.
Step 3: Assess liquidity and cryptocurrency selection. Low liquidity and limited coin options are common challenges with DEXs.
Step 4: Determine if a native token is required for gas fees and how to obtain it. Transactions on DEXs typically require payment in platform tokens, such as ETH for ERC-20 tokens. Consider purchasing the token through a CEX or directly from a wallet for easier access.
Step 5: Explore passive income opportunities offered by the exchange. DEXs provide access to DeFi tools like yield farming and liquidity pools for generating passive income.
