Exploring crypto exchanges: Pros and cons
Many people today are using crypto exchanges o find sellers and negotiate prices. In this article we look at their pros and cons.
The rise of cryptocurrency has led to a new way to store and trade digital coins. In the early days of Bitcoin, people had to track down other users on forums or Slack groups to buy and sell their digital assets.
Nowadays, crypto exchanges have made it easier for you to find sellers and negotiate prices. However, these exchanges also present some unique challenges that you need to understand before using them for your transactions.
Liquidity and trading volume
Liquidity and trading volume are two important factors to consider when choosing a cryptocurrency exchange. Liquidity refers to the ability to buy and sell an asset without affecting its price. This means that there are enough buyers and sellers at any given time in order for you to trade your coins without affecting their value.
Trading volume is simply how many shares or assets have been traded during a given period of time, such as one day or one hour. The more liquid a market, the easier it will be for you to enter (or exit) positions without affecting prices too much.
For example, if you want to swap USDT to MATIC, you need to make sure that there is enough liquidity for this pair on the exchange you are using. This means that there should be enough buyers and sellers of both USDT and MATIC so that you can trade your coins without affecting their price significantly.
High liquidity means that there are plenty of buyers and sellers at all times so you can get into or out of positions quickly without moving the price too much. High trading volumes mean there’s enough activity on exchanges so your trades won’t move prices too much either.
Diversification and variety
A cryptocurrency exchange is a good way to diversify your portfolio and gain exposure to different coins. Exchanges offer a variety of coins, such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP).
Some exchanges also allow you to trade on margin or short sell meaning that you can borrow money from them at interest rates ranging from 0% – 10%. You can then use this borrowed capital to buy more cryptocurrencies than you could afford otherwise.
Additionally, some exchanges offer trading pairs between two cryptocurrencies, such as WBTC to MATIC, in order for traders who want more flexibility when buying or selling their assets.
The pros of crypto exchanges
Let’s look at some of the pros of using crypto exchanges.
Liquidity and trading volume
A cryptocurrency exchange serves as a platform where individuals can exchange cryptocurrencies, primarily designed to ensure liquidity. This liquidity allows users to execute trades promptly without the need to wait for their orders to be fully processed before proceeding with subsequent transactions.
Diversification and variety
Greater market presence of exchanges enhances overall market dynamics, offering investors increased choices for allocating funds across various cryptocurrencies. This also assists individuals new to investing by providing multiple entry points for devising effective investment strategies. It also mitigates the risk of single points of failure, such as cyberattacks on specific exchange platforms, due to the existence of alternative platforms in the online realm, reducing vulnerability.
The cons of crypto exchanges
The risks of using a crypto exchange are the same as those of using any other online service
Vulnerability
The exchange is the most vulnerable part of the system. The risk of being hacked is higher for exchanges due to their centralization, which makes them an attractive target for hackers. In fact, some major exchanges have already been hacked in recent years, losing millions of dollars worth of cryptocurrency in just one attack.
The risk of bankruptcy and government intervention
Funds can be lost through bankruptcy or government intervention. If an exchange goes bankrupt before users’ funds are returned (or if it even fails at all), there’s no guarantee that you’ll get your money back.
And if regulators shut down an exchange without warning or cause for concern about its practices and security measures (such as during China’s crackdown on crypto trading), then users could find themselves stuck without any way out except selling their assets at fire sale prices on another platform or waiting until they become liquid again via market forces over time.
The top security concerns for cryptocurrency owners
Theft and hacking are the most prominent security concerns for cryptocurrency owners. In fact, according to a study by The University of Cambridge and Duke University, nearly one million Bitcoins have been stolen from crypto exchanges since 2011.
Phishing is another common way hackers can obtain your private keys and steal your funds. Phishing attacks often involve emails that contain links or attachments leading users to fake websites designed to look like legitimate exchanges (for example, Coinbase).
These emails may even come from someone you know like an email from your bank asking you to confirm some account information or provide additional personal details via an attachment so they can resolve some issue with your account.
Another way people lose money on exchanges is by dividing their funds between multiple wallets or accounts at different sites instead of keeping them all in one place where they will be safer from potential breaches at any given time.
Using hardware wallets such as Trezor Wallet or Ledger Nano S allows users who want added protection against hackers using phishing scams against them while also making it easy enough so anyone can use these devices without needing extensive technical knowledge beforehand.
In the end, it’s up to you to decide which crypto exchange is right for your needs. However, we hope that this guide has given you some insight into what makes a good or bad exchange in general terms.
Remember that there are many factors at play when choosing an exchange: liquidity, variety of coins and tokens available on the platform, and security features like two-factor authentication or password recovery questions (which we strongly recommend using).
