Exchanges

Centralized Exchanges (CEX)

Centralized exchanges (CEX) are platforms that facilitate the buying, selling, and trading of cryptocurrencies through a central authority or intermediary. Users must create an account and complete a Know Your Customer (KYC) process, which involves verifying their identity by providing personal information and documents. They might ask for your overall net worth and how liquid it is. On a CEX, the platform holds custody of users' funds in centralized wallets. This means users have to trust the exchange to secure their assets. While CEXs implement security measures, they are attractive targets for hackers due to the large amounts of funds they hold.

Examples of popular CEXs include Binance, Coinbase, and Kraken.

Pros:

• Easy to use with intuitive interfaces.
• High liquidity and variety of trading pairs.
• Customer support and educational resources available.

Cons:

• Users do not have full control over their funds.
• Subject to regulatory scrutiny and potential shutdowns.
• Risk of hacking and security breaches.

Decentralized Exchange (DEX)

Decentralized exchanges (DEX) allow users to trade cryptocurrencies directly with one another without the need for an intermediary. These exchanges operate on blockchain technology and offer a different set of benefits and challenges compared to CEXs. DEx use smart contracts to facilitate trades. Users maintain control of their funds at all times since DExs do not hold users' assets. Trades are executed directly from users' wallets.

Pros:

• Users retain full control over their funds.
• Greater privacy and less regulatory oversight.
• Lower risk of exchange hacks.

Cons:

• Not able to trade with fiat money.
• Lower liquidity can result in higher slippage.
• No customer support for resolving issues.
• Tracking trades is more complex.

Exchange Attributes

Selecting the right exchange is crucial for managing your cryptocurrency effectively. Here are key criteria to consider:

Fees:

• CEXs charge fees for transactions, which can include trading fees, withdrawal fees, and deposit fees. Fee structures vary between exchanges, so compare to find the best rates.
• Personal Experience: Exchanges want you to keep your funds on their platform. One way is by having high withdrawal fees. I once had to pay around $40 to withdraw BTC to my own wallet. At that time, a regular transaction cost around $1.50.

Ability to withdraw fiat:

• Make sure you can withdraw fiat money. Sounds obvious, I know. You might need to verify your bank account before withdrawing funds.
• Personal Experience: I had a situation where I wanted to withdraw but wasn't able to. The feature was not available anymore. I believe they switched payment processors at that time. I had to use workarounds to get my money, which had extremely high fees. The withdrawal feature for my currency wasn't available for months. This happened on a major exchange.
• Don't wait to check the withdrawal ability until you have huge amounts of fiat in your account. Test the withdrawal process beforehand.

Withdrawal limits:

• Exchanges have withdrawal limits and these can vary depending on the withdrawal methods, such as SEPA or PayPal. First-world problem, am I right. Having more money in the account than is allowed to be withdrawn is a nice problem to have. Just be aware of the limits.

Volume and Liquidity:

• Exchange volume refers to the total amount of cryptocurrency traded on an exchange over a specific period, usually measured daily.
• Liquidity refers to the ease with which an asset can be quickly bought or sold in the market without affecting its price.
• Use exchanges with higher volume. Also check the liquidity on specific trading pairs.
• Personal Experience: I've been kind of stuck with a trading pair where trades only happened every few minutes. It had huge spreads around $300. Compared to the daily volume, my order was huge (which in reality wasn't). There were not enough people active to quickly fulfill my limit order. This is not a situation you want to be in when you quickly want to buy or sell.

Trading Pairs:

• Check that the cryptos you want to trade are available on the exchange and check for specific trading pairs. You might have to convert to a stablecoin first and then buy your desired coin.

API Import / Trade Tracking:

Most of the CEX allow you to track trades via API imports.

• Verify if the trade tracking software you use can integrate with the exchange's API. Manual imports should be avoided if possible.
• When using DEX, you can import transactions by tracking addresses. Ensure your tracking tools support this feature. More on tracking your trades is covered in the chapter Trade Tracking and Taxes.

Scan for Exchanges:

You can find and compare exchanges on coinmarketcap.com or messari.io. Compare volume, number of assets, and other features.

Additional Features:

These are intended for advanced traders. Don't think about getting into leverage; this can take you out of the game. You're getting f$?#!ed soon enough even without leverage.

• Some exchanges offer leverage, shorting, futures, and other high-risk crypto products.

How to choose the right Exchange

Don't waste your time trying to find the perfect exchange; it doesn't exist.

One exchange might have lower fees, while another offers a great variety of coins. Diversification is key. Be prepared; don't wait until an issue occurs to start signing up for another exchange. I use different exchanges for different purposes all the time.

Sign up for at least 3 different exchanges. This way you can split your funds. If one temporarily goes down, you can switch to another exchange. If one goes bankrupt or gets hacked, you won't lose all your crypto.

Get comfortable connecting your wallet to decentralized exchanges. I recommend at least two DEXs.