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Centralized Exchanges and Factors to Consider While Choosing the Right One

| November 17, 2023

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Cryptocurrencies are making their mark as a popular asset class that belongs in every investor’s portfolio. These coins and tokens offer better returns than most investment vehicles existing in the financial markets. Bitcoin, the first ever cryptocurrency, stands the test of time by allowing many investors to make large profits on their investments. Similarly, several other cryptocurrencies are capitalized upon by those investing. The world of cryptocurrencies is large, and the opportunities for investing are at every corner. There are several means for investors to get their hands on these assets, but the most convenient way is platforms known as Centralized Exchanges or CEXs. They are highly popular cryptocurrency applications and are responsible for most of the actions witnessed in the crypto markets. Factors like the convenience and simplicity offered establish their prominence in the crypto segment. Moreover, their likeness to traditional trading platforms leads to familiarity, making them the gateway to cryptocurrency for new investors.

What Are Centralized Exchanges?

CEXs are online markets where users buy, sell and trade cryptocurrencies. Like trading and investing platforms offering traditional financial instruments, CEXs use order books to maintain a record of all transactions. These ledgers reflect the price that buyers are willing to pay for crypto assets based on their demand.

Using CEXs requires users to place an element of trust on them since they maintain order books and oversee transaction execution. This centralizes a lot of power in the hands of these third-party platforms, because of the control they possess over asset prices and user funds, which users believe they won’t misuse. The largest CEXs are known to operate ethically and provide an impressive experience that is attracting scores of investors on board.

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Why Are They Popular?

While decentralization of all aspects within the cryptocurrency ecosystem is an important factor for certain crypto investors, CEXs are still immensely popular among the masses. They offer the ease of use most investors look for, more so when dealing with a new disruptive asset class.

Acquiring cryptocurrencies using CEXs is a straightforward process. Users must create their trading accounts and complete KYC formalities, after which crypto assets can be purchased. These exchanges support effortless payment methods like online transfers and credit cards to fund cryptocurrency purchases. Apart from fiat-crypto trading, they also support a large number of crypto-crypto trading pairs for users to exchange one crypto for another. In addition, using CEXs also offers users the choice of funding their accounts with crypto deposits, and similarly, they can choose to make withdrawals either in fiat or crypto to their bank and wallets, respectively.

Of course, CEXs can maintain liquidity for all their tradable assets thanks to their massive user base — setting up buyers, sellers, and traders with each other, enabling fast transactions. The constant availability of crypto assets draws many investors, who are looking to buy them from platforms offering the least number of hassles.

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What To Look Out for While Choosing A CEX

CEXs are considered the least complicated way to buy cryptocurrencies, making them ideal for investors taking their first steps into the crypto markets. Despite the ease of operating these platforms, it is important to be aware of what transacting on them entails. Let’s look at some of the most important factors that need to be considered while choosing the right CEX to kick off your cryptocurrency journey.

Keeping An Eye on The Numbers

Exchanges with good track records often report huge trading volumes — reflecting the massive user base, liquidity, and capital flowing in. They present the least number of issues, offering a seamless and fairly secure experience as they cater to many users. Investors on such platforms can trade assets and cash in and out of their investments effortlessly thanks to the liquidity present on them.

No Such Thing as Too Secure

Investing in digital assets over online platforms comes with the associated risk of losing your funds to cyberattacks. Popular CEXs deal with assets worth millions of dollars, all concentrated in a single setting — the platform’s asset storage infrastructure. With so much to gain, cybercriminals are right around the corner, looking to exploit vulnerabilities and walk away with the funds. It is always recommended to look at the number of attacks a platform has suffered — the vulnerabilities exploited and the number of funds stolen — prior to making the decision.

CEXs are often custodial, meaning they control your assets by managing the associated private keys. It can’t be stressed enough that choosing a secure exchange is of great importance when your assets are held by them. Opting for an exchange that ensures the funds are in their custody and can reimburse you in the event of an attack is the ideal way to go.

Always be aware that CEXs are not an alternative to non-custodial crypto wallets where you control the private keys, so don’t keep more funds than what is required for trading on any CEX.

Cost of Transactions

Centralized exchanges charge transaction fees for every transaction and trade you make on their platform to keep their business running and offer a decent experience to their user base. Of course, robust storage infrastructures, constant liquidity provision, and keeping the platform up for the scores of users transacting round the clock does not come free of cost.

However, comparing transaction fees across various centralized platforms will help investors choose the one that is the most cost-effective for their needs. Certain platforms charge lesser fees for larger trades, while others are more suitable for lighter transactions. Picking the appropriate platform for your needs will help cut costs while transacting.

Centralized Exchanges Will Remain at The Heart of Crypto Adoption

Cryptocurrencies are disrupting the world of finance, and CEXs are the driving agents for crypto adoption. Platforms that are cultivating secure environments for their users to transact within while offering their services at affordable prices will rise to the top.

CEXs will remain to be highly popular and generate the most activity in the cryptocurrency sphere. Choosing the right platform is essential to start off your crypto journey on the right footing.

Hope you pick the right CEX to suit your needs. Meanwhile, we at Liminal will continue to help CEXs secure funds with innovative wallet infrastructure and crypto asset management solutions.

Learn more about Liminal here.

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