Bitcoin is considered to be the biggest innovation in the 21st century and the next step in creating money shape of the future. Bitcoin, Ethereum and other cryptocurrencies are already acting as a store of value as millions of people are using them all around the world. Professor William Knottenbelt from Imperial College London said that the world of cryptocurrency is evolving rapidly as the considerable collection of confusing terminology that accompanies it. He also added that the blockchain technology has the potential to upend everything we thought we knew about the nature of financial systems and financial assets.
Digital currency represents the value that is not issued by a central bank or government and has many benefits, unlike the traditional money we know. When you are using a credit card your personal information is attached and the bank can use that data to track your activities. When using cryptocurrencies, no personal information is revealed. Cryptocurrencies are digital and can’t be counterfeited so there is no fraud. Traditional transactions require fees and with digital currency, there are usually little or no fees at all. Digital currencies also have the big potential as there are around 2,2 billion people with access to the Internet and not to a traditional exchange.
Entering the crypto world
Even with the all mentioned benefits, there is still a lot of skepticism over cryptocurrencies and how they become a day-to-day payment system. Customers familiar with digital assets and currencies are using digital currency exchange (DCE) or cryptocurrency exchange which allow them to trade these currencies. Currency exchange rate can be the spot exchange rate or interbank rate and the nominal exchange rate. The way people read and define the exchange rate is similar to how they measure cryptocurrency values against the traditional currency.
Why crypto world?
Nowadays, people find the crypto world both exciting and amusing. A number of young people interested in the blockchain technology are increasingly growing as the Internet became an inseparable part of our everyday life. There, if you want to be part of the crypto world too, you should follow these short lessons about cryptocurrency exchanges.
Lesson #1: What are crypto exchanges?
Digital currencies can be traded through cryptocurrency exchanges. Digital currency exchange (DCE) allows customers to trade cryptocurrencies or digital currencies for other assets, such as other digital currencies or even conventional flat money. But with over 1,600 cryptocurrencies in existence, only a few of select exchanges available allow consumers to convert their fiat or paper currency into the crypto-based currency such as Bitcoin, Ether or Litecoin. Some coins can only be purchased by using these bases and consumers can’t buy them using a domestic currency like USD. The main reason for this is that these three currencies, Bitcoin, Ethereum and Litecoin are identified as base currencies for cryptos.
Consumers can do three things with cryptocurrency exchanges:
- to exchange one cryptocurrency for another cryptocurrency
- to purchase, sell and trade a particular crypto coin(s)
- to convert their fiat into another cryptocurrency
Traders can choose platforms through they can purchase or sell digital currencies for euros, dollars, pounds as well as other digital assets. For example, they can sell bitcoins and purchase dollars with the sold bitcoins, but before choosing an exchange, they should look at what it offers.
Lesson #2: Centralized cryptocurrency exchange
Centralized cryptocurrency exchange or CEX is an online platform and the most common way to trade digital currencies. CEX operates as the middle-man between two parties and includes buying/selling cryptocurrencies with fiat as well as with other cryptocurrencies which can be viewed as an online marketplace for the entire digital currency network. Being centralized means that one party is trusting another with some type of information or whatever asset may be in a trade. In a traditional bank, a customer gives their money over to the bank to hold for them and the bank is in complete control of the customer’s money. When it comes to centralized cryptocurrency exchanges, users can store their money on the exchange and the currency is now in the hands of exchange. The user can easily recover a lost password or 2FA because he has given the exchange full access to the account. This takes less stress and pressures off the consumers because they are 100% in control of their money.
Platforms such as Coinbase, Robinhood, Kraken, and Gemini became extremely popular because it made it easy for crypto pairings. Binance, Huobo and Bitfinex provide the only crypto to crypto pairings – purchasing or acquiring one crypto by trading in another crypto.
Security is an important thing when it comes to currency exchange and since 2011, there have been over 60 cyber attacks aimed at cryptocurrency exchanges and other digital currency platforms. The attacks include Mt. Gox (Japan, 2014), Bitfinex (Hong Kong, 2016), Coincheck (Japan, 2018), Coinrail (South Korea, 2018), and Bithumb (South Korea, 2018) continuing to present a high potential for system crashes. CEX targeted all attacks attracting the attention of black hat hackers galore. Because of these security vulnerabilities centralized systems contain, the idea of decentralized projects has exploded with tendency to maintain security and remove intermediaries to provide efficient, direct transactions.
Lesson #3: Decentralized crypto exchanges (DEC)
Decentralized crypto exchanges (DEC) such as Etherdelta, IDEX, and HADAX do not store users’ funds on the exchange but instead facilitate peer-to-peer cryptocurrency trading. They are resistant to security problems that affect other exchanges and are created for the purpose of removing the middle-man from any transactions. It’s like a marketplace where buyers and sellers engage in transactions directly.
Peer-to-peer systems (P2P) like Stellar DEX and Waves DEX are much harder to hack and while these seem to be a much better alternative to CEXs, popularity is still weaning and the reason behind this is the lack of commodity and user support.
Lesson #4: Hybrids
The hybrid crypto exchanges are created to combine the benefits from both CEXs and DEXs. They focus to provide privacy and security of a DEX. The first hybrid exchange Qurrex was launched this year and is considered to be the most professional platform for cryptocurrency trading.
Lesson #5: Choose the best crypto exchange that fits your domestic currency
Exchanges that accept fiat currency are limited in the number of coins readily available for purchase. Because of that, Coinbase platform became one of the most popular exchanges in the world which allow investors to purchase Bitcoin, Bitcoin cash, Litecoin and Ethereum with their fiat. Robinhood, Gemini and Kraken represent other examples. Investors are looking to purchase a base currency (BTC, LTC, ETH) in order to purchase other crypto or altcoins.
Lesson #6: Choose the right cryptocurrency
Users are not allowed to purchase altcoins directly from an exchange that accepts fiat, so they won’t be able to determine the value of the altcoin based on their domestic currency. ,, Trading pairs’’ represents the term that describes a trade between one type of crypto and another. If the user is looking at the trading pair ETH/BTC, he is looking at the potential to buy or sell one for the other. He can buy Ethereum with Bitcoin or sell Ethereum for Bitcoin. When it comes to this trade it is very important to understand how trading pairs work. You should be mindful of the potential tax implications associated whenever you convert one crypto to another crypto, or cash to crypto.
Lesson #7: Regulation
The very important thing also is checking if the platform for crypto exchange is licensed to exchange in money transmission. Coinbase platform is licensed to engage in money transmission in most U.S. jurisdictions. It is registered as a “money services”business with FinCen. Late this year, the IRS entered into an agreement with Coinbase to share user account information with it. Not all regulations are the same for all platforms so users should conduct their own due diligence to determine which platform is the best for their needs. Platforms like Binance and Kraken are finding their way into the New York Attorney General’s Office for potential regulatory violations. In February this year, U.S. Commodity Futures Trading Commission (CFTC) Commissioner, Brian Quintenz said:
“I think a self-regulatory organization, or SRO, for cryptocurrency exchanges, could spur the development of standards around cybersecurity policies, data retention, protection of customer accounts, trading practices and other issues”.
The conclusion is that it’s very important to take appropriate safeguards to ensure your wallet and other information stored in a safe place. Choose wisely and thoughtfully where you are going to buy or sell crypto, and before you start purchasing, educate yourself!