Most serious altcoin traders and investors end up using centralized cryptocurrency exchanges because such venues offer a lot of advantages. A centralized cryptocurrency exchange is a trading platform that functions like a traditional brokerage or stock market.
The difference between centralized and decentralized cryptocurrency exchanges is in the operation. A decentralized exchange is a peer-to-peer (P2P) platform that provides a connection between buyers and sellers. Transactions take place between individuals and the exchange has no control.
The centralized exchange is owned and operated by a company that has power over all transactions. Transactions can only be made through the mechanisms provided by the exchange and approved by the central authority. In most case,s the transactions can only be made with funds held in an account provided by the exchange.
Advantages to Centralized Cryptocurrency Exchanges
The popularity and use of centralized cryptocurrency exchanges is growing dramatically because of the advantages they can offer. These advantages stem from the centralized nature and formal structure of such altcoin platforms.
A key selling point of centralized exchanges is legality and regulation. Most of the centralized altcoin platforms are licensed and regulated by a government. They have to follow the law and can be held accountable if something goes wrong.
A related advantage is a higher level of transparency. Most centralized exchanges publish their ownership, their addresses, and their location. You will know who you are dealing with and where to find them. Some decentralized exchanges have no formal locations.
Another upside to a centralized exchange is that somebody is held accountable if something goes. A centralized platform should have a team of engineers whose job it is to maintain the platform and fix problems as soon as they occur. This can lead to a higher level of security because threats can be dealt with immediately.
A very popular aspect of these exchanges is fast customer service. There is usually somebody you can contact quickly if something goes wrong. At some decentralized exchanges there is often no way to contact the team behind the platform.
A Gateway between Fiat Currency and Cryptocurrency
The most attractive feature of centralized exchanges for most users is that they accept direct fiat currency payments, while many decentralized platforms only accept cryptocurrencies.
This enables most centralized exchanges to accept bank transfer, wire, and Visa and MasterCard credit and debit card payments. That enables accountholders to quickly convert fiat currency into crypto and to quickly cash out altcoin accounts when necessary. A lot of people use centralized exchanges as a gateway or exchange between cryptocurrency and fiat currency.
A related feature that some people fail to appreciate is that many centralized exchange accounts are insured. That means you will get your money back if something goes wrong. This can be a lifesaver for small investors.
Many centralized platforms offer margin trading (trading on credit), discounts for high-volume trading, institutional trading, and Forex style trading of pairs of currencies. Some of them also offer lending, and large amounts of financial data often in the form of charts. A lot of people use centralized exchanges simply to get up to date crypto market information
Some centralized exchanges are beginning to offer kinds of financial services including banking, digital wallets, and crypto-debit cards. The big advantage to some of these solutions is that they allow the spending of cryptocurrency from accounts at online retailers and brick and mortar stores.
Some Serious Drawbacks to Centralized Exchanges
There are some serious limitations and potential dangers to centralized exchanges that every investor should be aware of.
Such exchanges usually operate on a central mainframe or platform. That makes a big target for hackers and malware. All the accounts and the money in them, especially the cryptocurrency, is a lure for thieves. Since there is often only one platform involved the entire exchange can go down if it is knocked out.
Surveillance and tracking of transactions is easy because they go through a central clearinghouse. This means there will be less privacy and more vulnerability to criminals and others.
Privacy is limited, and risks increased, because you will have to provide a wide variety of sensitive information including bank account, credit and debit card, and identification numbers. You will probably have to provide your address and identity as well. This can make you more vulnerable to identity theft.
It can take time to set up accounts and process transactions. Many centralized exchanges only operate during business hours, and process transactions on specific days. A lot of them take time to set up accounts and may require a credit check or a deposit to open an account. A few may require you to keep a specific balance of money in your account.
Since they are subject to regulation, centralized exchanges can be more prone to taxation and other government actions. Most centralized platforms will have to share users’ information with tax collectors, and accounts at them can be seized or garnished for tax purposes.
Some Centralized Cryptocurrency Exchanges
The good news is that there are a lot of centralized exchanges for altcoins out there. The bad news is that it can be difficult to learn about them. To help you we will give you a quick overview of the better known centralized options.
Notable fiat-currency based cryptocurrency exchanges include:
This platform for professional altcoin traders has been in business since 2011 and claims to be the largest Bitcoin exchange. Among other things, Kraken was the first Bitcoin exchange to have prices posted on the Bloomberg Terminal.
Kraken has some appealing features including easy-to-read screens, but it can be hard to use. We had a difficult time figuring out exactly which currencies it accepts for trading.
The focus at Kraken is pair trading of cryptocurrencies and the US Dollar. Margin trading and high-margin trading are available. Kraken would be best for high-volume traders and professionals that need to comply with U.S. financial regulations.
This exchange is audited and goes out of its way to comply with U.S. law. Individual traders would be best served by some of the more consumer-friendly exchanges.
Bitstamp is a very-basic, no-nonsense exchange that is highly transparent. It claims to offer no-hidden fees and instant trading. Bitstamp tries to comply with financial industry standards.
The best feature of Bitstamp is the transparency, a list of trading pairs, and a description of services available appears right at the website. Traders should know what they can do at Bitstamp, right away. Nobody will need to spend time searching for basic information here.
Live trades and live order books are posted right on the website so people will know exactly what is moving on Bitstamp. The exchange offers a higher level of security by claiming to store 98% of the digital funds it receives offline. Bitstamp also subjects itself to a yearly audit by one of the Big Four accounting firms in an effort to comply with U.S. securities regulations.
Qurrex is a company based in the Netherlands that has plans to offer what it calls “the first hybrid cryptocurrency exchange.” The hybrid exchange is supposed to combine the best features of decentralized and centralized exchanges.
The Qurrex exchange is not available yet, but the company has plans to launch in 2018, after its initial cryptocurrency offering (ICO) of the QRX ERC20 (Ethereum-based) token is complete.
Qurrex is planning a number of next-generation Ethereum-based products, including an advanced trading terminal for blockchain-based assets. Those looking for alternatives to existing exchanges should take a look at Qurrex because it is being built by a team of experienced financial industry professionals.
The GDAX is a very well-respected centralized cryptocurrency exchange associated with the popular altcoin wallet Coinbase. GDAX offers a highly professional-looking trading platform that is reminiscent of a Bloomberg terminal.
GDAX is a good source of information as a well as a trading venue. One feature we enjoyed is the ticker that shows a streaming list of cryptocurrency prices at the bottom. It looks like a stock tickertape and helps you keep track of major Coin Prices in Euros and Dollars.
Other advantages at GDAX include transparency, there is an easy-to-read page at which all the fees are posted. That means you can actually figure out how much a trade costs in a few minutes.
There is a big limitation at GDAX, it only currently trades the four the cryptocurrencies currently accepted by Coinbase (Bitcoin, Bitcoin Cash, Ethereum, and Litecoin). It also only works with two fiat currencies; the U.S. Dollar and the Euro.
Gemini is a centralized exchange associated with the Facebook cofounders, turned cryptocurrency moguls, known as the Winklevoss twins.
Gemini is an exchange designed for institutional investors – such as hedge and mutual funds. Not coincidentally, the Winklevoss twins have been trying to start a Bitcoin-based exchange traded fund (ETF) called the Winklevoss Bitcoin Trust for some time.
Gemini offers large volume-trading services for institutional and professional investors based in the United States. To that end it has a higher level of regulation, Gemini was the first Ethereum and Bitcoin exchange licensed in the U.S. and it is regulated a trust company by the New York State Department of Financial Services.
All U.S. Dollar deposits at Gemini are stored in Federal Deposit Insurance Corporation (FDIC) insured banks. Most of Gemini’s digital assets are stored in its proprietary state of the art, Cold Storage system.
Gemini only offers trading in two cryptocurrencies; Ethereum and Bitcoin. Personal accounts are available, trading is offering in three order books with six different order types. Gemini would only be of use if you were a U.S. resident or financial institution planning for large volume Ethereum or Bitcoin trading. Everybody else will be better served by more versatile exchanges.
The CEX.IO is a highly-professional centralized exchange based in the United Kingdom. CEX.IO is licensed and regulated by Her Majesty’s Government, but it operates all over the world. The exchange claims to provide services in 99 countries and 24 U.S. states.
CEX.IO is popular because it will process Visa, MasterCard, bank transfer, and cryptocurrency payments. Note: CEX.IO will not take bank transfers in some countries such as a Canada.
CEX.IO offers a wide variety of services including margin trading, cross-platform trading, and extra services for institutional traders including more advanced payment methods. CEX.IO offers trading in a number of cryptocurrencies including Ethereum, Bitcoin, DASH, and Zcash.
Downloadable advanced reports of the balance and transaction history with transparent fees are available. There are some special features for high-volume traders at CEX.IO including access to a high-liquidity order book and lower trading fees.
Note: new user registrations were temporarily suspended at CEX.IO on January 2, 2018. The reason for this given in a press release was that the number of applications for new accounts at CEX.IO was simply too high for its customer service team to deal with. That means new customers might not be available at CEX.IO until the backlog has been cleared up.
Nicehash is a marketplace for cryptocurrency mining services such as hash power. Hash power refers to the computer space and power needed to mine altcoins such as Bitcoin, Ethereum, and Zcash from the blockchain.
Nicehash allows users to sell computing power from PCs, servers, workstations, ASICs, and farms or datacenter to miners. It also lets miners buy hash power from anybody who is selling it. The idea is to let investors or companies mine without owning equipment and to give those with equipment a way to make money off of it.
Some investors might like Nicehash because it is supposed to let you mine cryptocurrency on any pool that you want. Some observers consider Nicehash a cryptocurrency marketplace – even though it is not. Nicehash experienced a major security breach in which it lost $75 million worth of altcoins to hackers in December 2017, CNN reported.
Coinmama is a solution designed for people who simply want to buy or sell Ethereum or Bitcoin with a credit or debit card. The advantage to Coinmama is that you can buy small amounts of Ethereum or Bitcoin fast.
Coinmama offers no trading services but it is a great resource for average people that just want to buy some coin. It offers simple plans and accepts Visa or MasterCard payment – that means it will take most debit and credit cards.
Disadvantages include the facts that Coinmama will not take bank transfer payments and some credit-card brands, including American Express and Discover. It might also be a little pricey for persons seeking to buy large amounts of cryptocurrency and advanced investors.
Understanding Centralized Cryptocurrency Exchanges
Centralized cryptocurrency exchanges are a very useful tool that can help you expand your holdings and make money if you use them properly. Anybody who is serious about altcoin investing and trading will have to join a centralized exchange at some point.