What is a Cryptocurrency Exchange? Is it safe?

With every passing second of the clock, new cryptocurrencies are being mined and introduced to the market. Buyers are always looking for more convenient methods to purchase cryptocurrencies without bothering about unnecessarily slow transactions. Traders alike are looking for able buyers who are willing to purchase tokens from them at favorable market prices. 

Thus it becomes imperative for there to be a platform of some sort that facilitates these activities. This is where a crypto exchange comes good. Read on to find out more about crypto exchanges and whether they pose any safety threat to their users. 

What is a Cryptocurrency Exchange?

The term Cryptocurrency exchange is formed from two root words namely Cryptocurrency and Exchange. In the literal sense, it means a place where cryptocurrencies are exchanged which is indicative of buying and selling—typical of most commercial transactions. Just like how we have the Stock Exchange as a marketplace for the purchase and disposal of stocks, the crypto exchange market serves the same purpose for cryptocurrency trading. 

Types of Cryptocurrency Exchange

There are about 8 types of crypto exchange namely: 

Let's dive into each of them.

Centralized Exchange

From its name, you can infer that this kind of crypto exchange has a central governing authority that controls and oversees its affairs. Examples of such platforms are Binance Exchange, CoinBase, and Kraken. A centralized exchange is usually referred to as an intermediary or middleman as it is the bridge that connects willing buyers to sellers. As a buyer seeking to purchase Bitcoin, for example, bitcoin exchange can be carried out on such platforms. 

One characteristic of a centralized exchange is high liquidity. What this means is that trades are immediately executed since there are a lot of sellers and buyers. After completing your transaction (if you’re buying), you may then decide to keep your crypto on the exchange or send it out to another wallet. 

Decentralized Exchange

A decentralized exchange is a sharp contrast to a centralized one. Unlike the above, users utilizing this form of crypto exchange trade directly from their wallets. There is also no central governing authority in a decentralized exchange. 

A decentralized exchange boasts of an assortment of tokens including those associated with DeFi (Decentralized Finance). However, decentralized exchange platforms often face regulatory challenges, smart contract risks, and a slower execution time. Examples include Curve, Uniswap, Dydx, and PancakeSwap.

Peer-to-Peer Exchange

This type of exchange platform as opposed to the duo above connects buyers and sellers directly. On this type of crypto exchange, buyers and sellers are at liberty to negotiate the terms of their transactions and also the price. 

A peer-to-peer exchange also possesses an Escrow service feature. This feature ensures cryptocurrencies are held until payment is verified. In terms of security, the peer-to-peer exchange may appear to be the weakest link. As a result of its entire structure, it harbors the greatest risk of fraud and scams. Users seeking to carry out bitcoin exchange and other exchange transactions using P2P are often advised to check for positive reviews of existing traders before opening a trade.

Crypto Broker

Buying and selling takes place on this form of exchange like the others albeit in a user and beginner-friendly manner. Unlike traditional exchanges, users of a crypto broker are not necessarily the owners of the cryptocurrency. They mostly speculate on the price movements or trends of tokens. A crypto broker offers its users social trading which is a good opportunity, especially for beginners to adopt the trades of experienced and astute crypto traders.

Fiat to Crypto Exchange

As the name implies a fiat to crypto exchange is one that allows users to convert regular currencies like USD, AUD, GBP, or EUR to cryptocurrencies like ETH or BTC seamlessly. 

Crypto to Crypto Exchange

Unlike the above, a crypto-to-crypto exchange platform allows users to trade a cryptocurrency for another. A practical example is the trading of BTC for ETH or ETH for BTC

Hybrid Exchanges

Unlike a centralized exchange, where users deposit their assets to the platform, a hybrid exchange empowers its users with full control over their assets and a retainment of their personal keys. 

Token Swap

When using a token swap, users can directly exchange or trade a particular token for another without the need to convert it to traditional fiat currencies as is the case with Fiat to crypto exchange.

Are Cryptocurrency Exchanges Safe? 

The safety of cryptocurrency exchanges often depends on the security measures put in place by the exchange and the customer. 

However, unfortunate situations regarding the usage of crypto exchanges can be avoided. Here is what you should check out for:

Conclusion

Regardless of the exchange you settle for as a user, there are some factors you must not compromise on. Factors like security, availability of cold storage, and user-friendliness are the pain points of the average cryptocurrency investor. 

Aside from the inherent features that a reliable exchange must have, you must also do due diligence by ensuring you regularly update the software and install security updates to prevent malicious attacks or hacks.