Recently, we have seen a bull market in cryptocurrencies, which has meant an increase in the adoption of all types of digital assets, which has increased the legitimacy and popularity of cryptocurrencies in general. Financial institutions, investment firms, corporations and retail investors are stepping on board, many for the first time.
If you are interested in taking advantage of the opportunities provided by the cryptocurrency space, you may be wondering where to start. In this guide to buying cryptocurrencies on exchanges, we'll go over some of the important questions you should ask before you get started. How do cryptocurrency exchanges work? What is the difference between centralized and decentralized exchanges? How many cryptocurrency exchanges should you buy cryptocurrencies on at any one time? What are the risks associated with using a cryptocurrency exchange in 2022 and what regulation is in place?
Ready? Let's start!
Cryptocurrency exchange websites and mobile applications allow users to buy, sell or exchange digital currencies for other assets, such as fiat (GBP, EUR, USD, etc.) or other cryptocurrencies. Also there exist platforms like Profit Trader software than helps to make online crypto investing seamless and easy.
There are countless types of cryptocurrency exchanges offering different coin options with higher and lower trading volumes, different platform features, and different security measures. To diversify your trading as much as possible and reduce the risk of account hacking, it is worth holding the currency on two or three different exchanges at the same time.
There are also a number of different models of cryptocurrency exchanges. One of the differences is whether you can use fiat currency to buy the cryptocurrency you trade on the exchange, and whether you can convert your cryptocurrency back to fiat after closing positions.
Another significant difference between exchanges is whether they are centralized or decentralized.
The most famous and largest exchanges, as a rule, are centralized. These include Coinbase, the largest of all cryptocurrency exchanges by number of users; Binance, the largest in terms of trading volume, and Gemini, another major competitor in this space. Centralized exchanges are especially popular with novice crypto investors as they tend to be more intuitive and more likely to offer dedicated 24/7 support through various social channels and chat.
Another factor that makes centralized exchanges suitable for beginners is that they take custodial responsibility for storing your private keys. This is generally much safer than storing data on your personal device, as exchanges spend millions on cybersecurity to keep your personal information intact and safe. A forgotten seed phrase or a missaved address can mean the irretrievable loss of all your holdings, so many beginners find peace of mind by transferring data storage responsibility to a large, reputable, centralized wallet.
However, there is a danger of transferring responsibility for your private keys to the exchange, which is the risk of losing your funds if the exchange becomes insolvent or is hacked.
In 2019, $292,665,886 worth of cryptocurrencies and 510,000 user logins were stolen, and in 2020 there were five major exchange hacks, during which $286,933,760 worth of digital currency and 200 customer data items were stolen.
Year by year, the situation is gradually improving, exchanges are learning to better protect their systems. For example, centralized cryptocurrency exchange Binance was able to protect users' funds when it was hacked thanks to its Secure Asset Fund for Users, which reinvests a portion of the company's profits into a reserve fund in the event of an attack.
Now, the best decentralized cryptocurrency exchanges. Unlike their centralized counterparts, where a central server controls financial activity, decentralized exchanges (DEXs) are blockchain-based applications that use smart contract technology to carry out direct peer-to-peer transactions. Payments are faster and smoother than in a centralized system, since there is no client verification procedure.
Among the best examples of decentralized exchanges are UniSwap, one of the fastest growing DEXs, Kyber, and 1inchExchange, a leading aggregator. This type of cryptocurrency exchange typically offers a wider selection of cryptocurrencies as well as access to liquidity pools where, in exchange for providing funds, you can earn trading fees from transactions occurring in the pool in proportion to your share of the total liquidity.
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