Today I’d like to answer a question I get asked a lot by my investment students: What are the different types of Cryptocurrency Exchanges? A cryptocurrency exchange is a web-service that can help people exchange their cash money into cryptocurrencies and vice versa. Most exchanges are more focused on providing services to help you exchange a cryptocurrency such as Bitcoin, into other digital currencies like Ethereum, Litecoin, etc. There are currently three types of exchanges out there: centralized or CEX, decentralized or DEX, and hybrid. Read on to learn about each of them, their differences, and their pros and cons.
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1- Centralized Cryptocurrency Exchanges
This is how a centralized exchange typically works:
- You give your money to the exchange
- They hold it for you (like a bank, or a trusted middleman)
- You watch the prices of the available cryptocurrencies on the exchange
- Depending on the exchange, you can trade your fiat currency (like the US dollar) for a cryptocurrency (like Bitcoin.) With most exchanges, however, you’ll find better luck exchanging two cryptocurrencies for one another. We talk more about cryptocurrency pairings in Chapter 9.
- You place your order
- The exchange finds a seller to match your buy If you’re selling, the exchange finds you a buyer.
- Tada! You just crypto-shopped on an exchange.
Most centralized crypto exchanges have crypto/crypto pairings. But not all of them provide fiat/crypto pairings.
For newbies who are trying out different types of cryptocurrency exchanges, it may make more sense to start at an exchange that offers fiat/crypto pairings. That’s precisely the reason why in 2017 and 2018 exchanges who provided this service became some of the most popular ones. However, you’d need to consider other characteristics of the exchange as well before choosing one.
CEXs that Offer Fiat/Crypto Pairings
At the time of writing, some of the most popular centralized different types of cryptocurrency exchanges that offer fiat/crypto pairings include:
- Coinbase – most popular in the world, supports Bitcoin, Bitcoin Cash, Litecoin, and Ethereum. Here’s my referral link for you, so that we both get some free Bitcoin as a gift: https://www.coinbase.com/join/59d39a7610351d00d40189f0
- Bitterex – Based in Seattle, fast growing, supports USD, Bitcoin (BTC), Ethereum (ETH), Tether (USDT) and a variety of other pairings.
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- Kraken – has a variety of crypto/fiat pairings with more than just USD and EUR, which can be viewed on their site. Personally, I’ve had problems with their services and customer support in 2018.
- Gemini – Based in New York with high regulation standards for the US. Supports Bitcoin (BTC), Ethereum (ETH), Zcash (ZEC) and the US dollar (USD).
- Robinhood – a popular financial services and trading app originally offering stocks and ETF services, now providing fiat pairings to Bitcoin and Ethereum. It also supports real-time market data for more cryptos such as Dash, Ripple (XRP), Stellar (XLM) and more. One of my personal favorites due to ease of use. Here’s my referral link for you, so that we both get some free stocks in our portfolio: http://share.robinhood.com/kianad1
CEXs that Only Offer Crypto/Crypto Pairings
Then we have centralized crypto exchanges that only provide crypto/crypto pairings. Some of the most popular ones at the time of writing include:
- Binance – Offers mobile app. One of the fastest growing exchanges in 2018.
- Huobi – As of 2018, not available for US users due to government policies. Supports Tether (USDT), Bitcoin (BTC), Ethereum (ETH), and Huobi Token (HT) against a variety of other cryptos.
- KuCoin – Fast growing exchange supporting a variety of cryptos found on their website. Offers a mobile app.
- Bitfinex – Offers mobile app. You can also lend crypto here to earn interest.
2- Decentralized Cryptocurrency Exchanges (DEX)
Next, we’ve got Decentralized cryptocurrency exchanges who aim to stay true to the pure philosophy behind the cryptocurrency industry. A DEX does not rely on a middle-man to hold your funds. It is a marketplace where buyers and seller come together and process the transactions directly between one another.
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In other words, DEXs facilitate peer-to-peer trades. Decentralized cryptocurrency exchanges are harder to hack. However, on the flip side, you are more vulnerable to locking yourself out of your money. Other problems with DEXs may include low volumes and low liquidity due to lack of popularity at the moment.
Here are some of the most popular decentralized cryptocurrency exchanges as of 2018:
- IDEX – a decentralized exchange for trading Ethereum tokens. It is among the most user-friendly DEXs, and can easily connect to your crypto-wallet, something we’ll cover in Chapter 5.
- Waves DEX – allows you to trade Bitcoin, Ethereum, Litecoin, ZCash and a variety of other cryptos, including their own crypto token, WAVES. You can also trade fiat currencies such as the US dollar and the Euro. As of July 2018, WAVES DEX has seen $5 million daily volume.
- Stellar DEX – based on StellarTerm.com, this is Stellar platform’s DEX system. It supports for Bitcoin, Ethereum, Ripple, Litecoin, as well as some fiat currencies such as the US Dollar, Japanese Yen, Hong Kong Dollar, and Chinese Yuan. To start trading on this DEX, you will have to deposit 20 Stellar Lumens (XLM). We will talk more about these cryptocurrencies in Chapter 7.
- Bisq DEX – it is based on pure peer-to-peer infrastructure. You can exchange fiat currencies such as dollars, euros, or yen for bitcoin, and trade a wide range of alternative cryptocurrencies for bitcoin.
3- Hybrids – Different Types of Cryptocurrency Exchanges
Finally, we’ve got Hybrid cryptocurrency exchanges, which are known to be the next generation crypto trading marketplace. They aim to merge the benefits from both centralized and decentralized exchanges. More specifically, hybrids seek to provide the functionality and liquidity of a CEX with the privacy and security of a DEX. Many believe such exchanges are the real future of cryptocurrency trading experience.
The first ever hybrid exchange was Qurrex, which launched in 2018. The Qurrex team got together in 2016, consisting of experts who had years of experience working in the forex markets, developers of trade terminals, and founders of successfully operating stock and futures exchanges. They all saw the significant potential in applying the best practices of the traditional exchanges to create a new generation of cryptocurrency exchange, providing a harmonious merge of centralized and decentralized elements.
In the comments below, let us know what type of an exchange you prefer and why.
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