Understanding Cryptocurrency Exchanges: CEX vs. DEX

When it comes to trading stocks and ETFs, many day traders use centralized exchanges and online brokerage firms. Traditionally, once a trader deposits 25,000 dollars on her cash account, she can avoid a pattern Day-Trading rule and begin actively trading immediately. In addition, maintaining a margin account will also allow an individual investor to hold short positions and purchase commodities and futures.

When it comes to crypto-trading, individual investors have a variety of opportunities to trade digital assets. For a 200 billion-dollar market cap, there are more than 200 crypto-exchanges, including multiple crypto dark pools and traditional exchanges with bitcoin-related securities. In order to understand how and where to acquire digital assets for an individual investor, we will compare the two most popular types of crypto exchanges available in the cryptocurrency space today.

CEX or Centralized Exchanges

Investors looking to branch out into trading cryptocurrencies usually refer to the use of centralized exchanges. Just as traditional online brokerage firms and exchanges, many centralized crypto-exchanges offer similar opportunities to deposit funds into an account, trade on margin, open short positions, and trade both crypto/crypto and fiat / crypto pairs. Buyers and sellers trust the middle man to help them hold their money, conduct different transactions, or offer security and monitoring. The world’s largest cryptocurrency exchanges by adjusted trading volume are usually centralized exchanges. As measured by CoinMarketcap, the exchanges of Binance, Bitmax, and OKEx ranked amongst the top of all leading exchanges by adjusted trading volume for the past 30 days. In addition to volume and liquidity, CEXs usually have a well -planned system that automates the work for its clients. Unlike using a digital wallet and being exposed to the basic risk of forgetting a private key, centralized exchanges can safeguard its client’s funds in place and help individual investors access their capital.

Even though CEXs might have been the most preferable way of trading crypto for the past 9 years, they have shown some vulnerabilities and have experienced security issues. In 2018 alone, hackers stole more than $1bln from centralized crypto exchanges. This number is equivalent to 2.7 million dollars being stolen on a daily basis. For the last year, the total amount stolen from exchanges increased by 13 times compared to 2017. Also, CEXs are not truly anonymous, as they store personal data of individual investors on exchanges, as well as private keys in hot wallets. This practice can definitely pose a threat to investors credentials. Many CEXs have been also accused of wash trading and creating fake volume as well.

DEX or Decentralized Exchanges

Unlike CEXs, Decentralized Cryptocurrency Exchanges enable anonymous transactions with minimum information on each individual investor. More experienced crypto traders who respect full control of their funds and aim to have a control, to some extent, of their personal data, prefer decentralized exchanges. DEXs provide greater security since they don’t have access to investor’s private keys and don’t require its clients to hold funds in hot wallets whose vulnerabilities allowed hackers to access investors’ capital in the past. However, this does not mean that hot wallets should be completely avoided; they still speed up transactions, but do so with some built-in security risks. In simple words, they can be compared to checking accounts, while cold wallets can be compared to savings accounts.

On top of that, opening an account can be also quite easy. For instance, OpenLedger, a decentralized exchange based in Denmark, does not require any registrations or KYC (Know Your Customer), which makes the whole process much easier. Another DEX, Bitsquare, uses Tor to provide a full anonymity of transactions. People who are interested in buying a large amount of cryptocurrency or trading ERC20 tokens would be better served by decentralized exchanges. In addition to anonymity and a full control of capital, blockchain revolutionized margin trading. In other words, blockchain made it possible to substitute margin trades with the revolutionary Hedge Trade system that allows traders to acquire digital assets by the means of escrow of their digital holdings.

CEX vs DEX

Every investor should understand that she can trade cryptocurrencies on different exchanges. Recognizing the value proposition of different types of exchanges can have a humongous impact on a trader’s financial performance. While CEXs can offer good liquidity, DEXs can provide greater anonymity for individual investors and revolutionary hedge trade systems, which were not possible on centralized exchanges.

Novice crypto traders usually prefer centralized exchanges, since they remind them of the well-known NYSE and NASDAQ, as well as online brokerage firms such as E-Trade and Ally. As a trader becomes more experienced in trading cryptocurrencies, or does not want to risk her capital in margin trades and use a hedge trade system instead, she can change to DEX and have full control over her crypto assets.

CEXs, DEXs, cryptocurrency dark pools, forex brokers, CME, and CBOE with bitcoin-related securities are all a part of the massive worldwide cryptocurrency ecosystem. Every player has a vital role in building a bigger blockchain economy, and each one contributes to the existence of the other.