Overview on Cryptocurrency And Its Attached Segments
Many innovations have come into the financial industry, however, nothing made as much noise as the new intangible asset did. This commodity paved way for a unique method of making purchases on an exchange. Let us share more information about it along with its related systems.
Cryptocurrency is a virtual currency exchanged on trading platforms without the involvement of intermediaries like banks, brokers etc., it is a virtual payment system that allows peer-to-peer sending and receiving of funds. All the transferred transactions are updated in a public ledger. The digital cash is stored in a crypto wallet. This currency derived its name because of its encryption feature to verify transactions.
Advanced coding is implemented for the storage and transmission of virtual currency data between wallets and public ledgers. The concept of encryption is to ensure security and safety.
Mechanism of the trade
Blockchain technology is a distributed public ledger where cryptocurrencies are run. Transactions of currency holders are stored in this ledger. A process called mining creates units of digital gold by the usage of computing power which is efficient in solving complicated mathematical problems to generate coins. Customers have the choice to purchase virtual coins from intermediaries, then store and spend them using crypto-wallets.
Digital currency trading is an intangible asset exchange. The user can move the record from one person to another person without an intermediary.
What are cryptocurrency exchanges?
A platform that facilitates the trading of crypto for assets like fiat currencies is called a cryptocurrency exchange. This exchange makes a profit through commissions and transaction fees for acting as a bridge between buyer and seller. Two types of platforms are currently in use.
Centralized crypto exchange
Decentralized crypto exchange(DEX)
Centralized crypto exchange: This platform performs the role of a third party between the purchaser and seller. This is operated and regulated by a company which is why it offers reliability. The majority of the crypto transactions pass through centralized exchanges. Coinbase, GDAX, Kraken are a few examples of centralized crypto exchanges.
Decentralized crypto exchange(DEX): These exchanges foster the execution of peer-to-peer transactions with the absence of an intermediary or third party. Investors who have concerns with the centralized platforms prefer DEX. One of the differences is that the decentralized exchanges do not render trading of fiat currencies for cryptocurrencies. DcoinTrade, Blocknet, AirSwap are some of the decentralized crypto exchanges.
Advantages of Centralized Cryptocurrency Exchanges
User friendly
Trustworthy
Insurance
User friendly: Budding investors can access and use the medium with the help of third parties for trading and investing. Transactions are carried out through customers’ accounts from applications and websites unlike the usage of wallets in the decentralized crypto exchange.
Trustworthy: The process of performing transactions is done through a developed centralized platform thus promoting an extra layer of security and reliability.
Insurance: There is a risk of digital attacks in any online market, which is why insurance is necessary. A few of the centralized platforms offer insurance for the elimination of worries. A fee is charged for the same.
Disadvantages of Centralized Cryptocurrency Exchanges
Hacking risk
Transaction fees
Strict regulations
Hacking risk: Companies that own responsibility for customers’ holdings operate the Centralized exchanges. A bitcoin worth billions held by an exchange is a target for hackers and theft.
A digital currency transaction resolution is in discussions to address potential issues that could attack cryptocurrency exchanges in the form of frauds and scams.
Transaction fees: Trading in ransom amounts with the assistance of a financial institution incurs huge expenses as it includes transaction fees for the intermediary.
Strict regulations: The government licenses these platforms which means a compliance audit will be performed by the regional and federal government agencies. This signifies that the stored data will be accessed by authorities. Clients who prefer privacy can back off due to this drawback.
Advantages of Decentralized Cryptocurrency Exchanges
Mitigation of risk
Prevention of market manipulation
Anonymity
Cheaper
Mitigation of risk: The exchange is devoid of transfers to third parties. This means the absence of a financial institution such as a bank or broker for assistance in investment eliminates the fear of theft and hacking.
Prevention of market manipulation: Customers are shielded from fake trading and wash trading; an outcome of prevention of market manipulation due to peer-to-peer exchange feature offered by a decentralized platform.
Anonymity: The absence of identity revelation deletes the steps like filling out a know-your-customer(KYC) form and maintains privacy and anonymity.
Cheaper: A centralized system has to incur additional expenses for installation and maintenance of infrastructure to provide secure wallet services whereas such costs are not needed in a decentralized system as smart contracts self-execute on meeting set conditions.
Disadvantages of Decentralized Cryptocurrency Exchanges
Complexity
Lack of fiat payments
Liquidity struggles
Limited speed
Complexity: A user is bound to grieve loss if he forgets the keys and passwords of his wallet because there is no fixed method to recover locked wallets. There is a need to learn and update oneself with the latest amendments to remain in the field. On the other hand, centralized exchanges are very simple to use.
Lack of fiat payments: The exchange of fiat currencies for digital ones is prohibited on the medium. This restriction gets inconvenient for some of the users.
Liquidity struggles: As mentioned earlier, a majority of the crypto transactions occur on centralized exchanges meaning that they are creating more trading volume. The decentralized platform lacks volume which is why it lacks liquidity. This may interfere with the trading flow between sellers and buyers.
Limited speed: The checking and validation of transactions take time on a blockchain network. The speed control is independent of exchange; dependent on the network’s miners.
Conclusion
With the discussed potential benefits and risks of financial innovation, we hope this article gave you a glimpse of crypto-related information. If you are planning on trading in virtual currency, we would like to let you know that risk is an important factor to consider before entering the crypto world as the nature of the prices is volatile. It is more suitable for a speculator than an investor because there is a possibility for huge returns or complete vanish of capital due to the volatility and security risk factors.