Centralized Cryptocurrency Exchanges, Explained
What is a centralized cryptocurrency exchange?
It is an online platform and the most common way to trade cryptocurrencies.
This includes buying/selling cryptocurrencies with fiat money (fiat/crypto pairs) as well as buying/selling cryptocurrencies with other cryptocurrencies (crypto/crypto pairs). They can be seen as an online marketplace for the entire cryptocurrency development network.
What does it mean for an exchange to be centralized?
Being centralized means trusting someone else to handle your money.
In the past, the word “centralized” was given to all institutions that managed finances.
Being centralized means that there is a trusted broker to handle any asset that may be in a trade. In a bank, for example, a customer gives his money to the bank to hold. This institution now has full control of the client’s money.
In many cases, this is much safer than a person finding some way to manage himself. Banks have many securities and a team to monitor their clients’ money. The bank can also offer a variety of services, such as loans because the bank has a large amount of money and has created a trusting relationship with the customer.
Centralized cryptocurrency exchanges are no different. This can also take the pressure off the customer to have 100% control over their money. If your money was on a centralized exchange, you wouldn’t have to worry about that; Recovery would be as easy as showing a passport or verifying identification.
3.How is a centralized exchange different from a decentralized one?
Cryptocurrencies and the blockchain are decentralized by nature, which also allows exchanges to be decentralized.
In simple terms, a decentralized cryptocurrency exchange (DEX) cuts out the middle man by creating a highly intelligent ‘trustless environment’. The offerings are made through smart contracts and atomic exchanges so that the currency never passes through the hands of an escrow service — it is only peer-to-peer. DEXs are still in their infancy and not very popular yet, but 2018 may see a lot of progress with decentralized exchanges.
4.Do all centralized exchanges provide fiat/crypto pairings?
All exchanges have crypto/crypto pairing (ex: exchanging 1 BTC for 9 ETH), but not all have fiat/crypto pairings (ex: exchanging $ 900 for 1 ETH). Some of the most popular exchanges that provide fiat/crypto pairings are:
Coinbase — the most popular in the world — supports Bitcoin, Bitcoin Cash, Litecoin, and Ethereum.
Gemini — Based in New York and high regulatory standards for the United States. Supports Bitcoin and Ethereum
Kraken — Kraken has a variety of crypto/fiat combinations in addition to USD and EUR, which can be viewed on their site.
Robinhood — a popular trading application that provides fiat pairings to Bitcoin and Ethereum.
5.Is volume important to exchanges?
The more volume there is on an exchange, the less volatility and market manipulation there will be.
If Alice is trying to buy 1 BTC for the current exchange price of $ 10,000 and the volume on the site is extremely high, chances are that she will buy the 1 BTC almost instantly. If the market price is $ 10,000 on a very low-volume site, she can consume all the sell orders that are at $ 10,000 before she can buy your entire Bitcoin. So Alice would need to buy the highest sell orders to satisfy her order, losing money and also causing the price of Bitcoin to go up on that exchange.
6.Are Centralized Cryptocurrency Exchanges Safe?
No centralized exchange is immune from attack.
Many hacks have occurred throughout the course of cryptocurrency history, but in many cases, the exchange pulled out of pocket to pay customers for stolen money. DEXs are impossible to hack, but users are much more vulnerable to running out of money.
7.Is verification required to open an account on an exchange?
The regulations of each country are still confusing, but exchanges around the world require minimal verification to authenticate the account.
Many exchanges allow users to open an account without identity verification, but those accounts will have extremely small withdrawal/deposit limits. Basic verification typically requires a picture of the user’s passport / ID, and 2-Factor Authentication enabled. 2FA is a secret password that is regenerated every thirty seconds or at least every time a user enters their account. 2FA is normally saved on the user’s phone.
8.Which exchanges have the most volume and crypto pairings?
While the exchanges are still new and becoming more popular every day, there have been some in the last year 2017 that have stood out in volume and quantity of coins to trade.
Binance. While Binance was launched in 2017, it has already started trading the highest volume of any exchange. This China-based exchange is so popular that most altcoins first move to this major exchange after its ICO. Level two verification allows you to withdraw 100 Bitcoin while level one allows you to withdraw 2 Bitcoin/day.