Learn to Day Trade - Get Free Mini Course

The Advantages and Disadvantages of Centralized Exchanges

Centralized exchanges are very popular among people who want to sell or trade cryptos. They enable traders to use a secured and intimidating interface to perform their trades. The trading platforms operate similarly to traditional stock markets or brokerage markets. 

In a centralized exchange, the company that owns it will have total control over the transactions. CCE users don’t have access to their exchange account wallet private keys. Therefore, the exchange operators are the ones in control of everything, and users have to trust them with their funds. But centralized exchanges have a physical location, and they are regulated, meaning that users will be able to sue the company when something bad happens. They can also hire lawyers for centralized exchanges to help them with the case.  

Centralized exchanges have their pros and cons. So, before using one or choosing a centralized exchange instead of a decentralized one, you should know the advantages and disadvantages. Keep on reading to find out what to expect. 

Pros of Centralized Exchanges

Centralized cryptocurrency exchanges are private companies offering crypto trading. Thanks to them, investors are able to buy cryptocurrency with fiat currency and sell it. Of course, they also have the chance to exchange a cryptocurrency for another. 

Trading can occur smoothly, on a platform with an organized interface. The companies hosting the exchanges are licensed and have their own employees. But this is only the surface: centralized crypto exchanges have many benefits. 

  • Fast Transactions: Speed is one of the main reasons why centralized exchanges are so popular among investors. The quick transactions will allow complex trade types to take place but will also improve the experience of the users.
  • They Offer Protection Against Scandals: Cryptocurrencies are used with Internet access. A lot of complicated jargon is usually associated with centralized exchanges. This is what makes a lot of beginner investors quite afraid to start their crypto trading experience. 

Without a centralized agency, the transactions can be quite risky. Many scandals had to be endured by crypto investors, so conservative investors want to make sure that they work with a reputable company to protect them from such scandals. Therefore, centralized exchanges are the saviors in this situation because they are regulated by the government and have a physical location.

  • Easier to Use: It is much easier to use a centralized exchange, especially as a new investor. This is because the transactions are entrusted to a company. Even though they need to pay a small fee for this sometimes, people can get tools to monitor their assets and gain easy access to their money. 
  • Safety Insurance: Just like any other crypto exchange, centralized exchanges are also susceptible to digital attacks. Hackers may target them at any point, looking to put their hands on the crypto assets. But centralized exchanges are insured for a small extra fee. This way, investors can rest assured that they will be protected in case a digital attack happens.

Disadvantages of Centralized Exchanges

As you can imagine, centralized exchanges also have their fair share of downsides. Here is what you need to know:

Decentralized exchanges use peer-to-peer transactions, which can be done anonymously. Therefore, you can send money to anyone for any reason, something that is not possible with centralized exchanges.

  • Bankruptcy Risk: Centralized exchanges are private businesses, so the money they have in custody is a loan they got from an investor. The change of default is always there with a loan. So, anyone who uses a centralized crypto exchange will be at risk of losing money due to this matter.
  • Less Variety: A lot of centralized exchanges are focusing more on safety than variety. For this reason, they will have fewer cryptocurrency types available for trading. Usually, no more than 40 or 50 can be found on these exchanges. Sure, it may not be an issue if you are using one of the most popular cryptos like Bitcoin or Ethereum, but it still limits trading options for many people. 

Conclusion

Centralized exchanges have more rules, and they are easier to use for beginners. On top of that, their transactions are quite fast too. But they have some downsides as well, such as having less variety, less privacy, and being at risk of bankruptcy. It is up to you to analyze the pros and cons and decide if you want to go with a centralized exchange. 

GOT QUESTIONS? LET'S CHAT
ALREADY A COURSE MEMBER?