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Investors are rushing to get into the Bitcoin and other assets as a result of cryptocurrency’s popularity. In the last few years, these markets have seen a significant growth in trade activity. However, it might be challenging for new investors to comprehend the buying and selling of cryptocurrencies. Given the variety of ways to buy and sell cryptocurrencies, this is especially crucial.
When beginning their cryptocurrency investment journey, traders frequently have to decide between centralized and decentralized exchanges. We will examine centralized cryptocurrency exchanges in more detail in this post, as well as the benefits and drawbacks of investing through them.
What are Centralized Cryptocurrency Exchanges
Private businesses that facilitate Bitcoin trading are known as centralized cryptocurrency exchanges. They offer a platform through which investors can purchase cryptocurrencies using fiat money. As an alternative, they can change one coin kind into another. These are legally recognized businesses with offices, personnel, and other physical infrastructure.
Before deciding if centralized exchanges are better to decentralized ones, it is important to understand all of the disadvantages.
Disadvantages of Centralized Cryptocurrency Exchanges
There are various drawbacks to using centralized exchanges. Some of them are listed below:
- Fewer Options: On centralized exchanges, investors eventually trade diversity for safety. Only 40 to 50 different types of cryptocurrencies can be traded on the majority of centralized exchanges. This is a very small portion of all cryptocurrencies available. These exchanges only permit reputable cryptocurrencies to list because their reputation is highly important to them. But it also limits the range of trading alternatives. Reduced alternatives also have a financial impact because more recent cryptocurrencies have seen the majority of growth in recent years.
- Strict Regulations: The government issues licenses to centralized exchanges. They are therefore need to adhere to rigid government regulations. Some of these exchanges have know your customer (KYC) standards that are on par with those of major banks. Exchanges that are centralized work with a range of local, state, and federal government organizations. These authorities may also have access to the data at these exchanges. For many investors who value privacy, these stringent laws are a deal-breaker.
- Bankruptcy Risk: The centralized exchanges are private businesses as well. As a result, the funds under their care are actually a loan from an investor. There is always a possibility of default whenever there is a debt. There hasn’t been any information of any exchange going bankrupt up until this point. Nevertheless, there is always a chance that this could occur in the future. Due to such bankruptcies, users of these centralized cryptocurrency exchanges run the danger of losing money.
The fact is that centralized cryptocurrency exchanges give the trade of these digital currencies some legitimacy. Without these exchanges, it can be risky and unclear to enter and exit the cryptocurrency markets.
Bear Markets Break Centralized Exchanges
When a bear market comes in play, even the top centralized exchanges are having difficulties to continue to operate flawlessly. The first issues begin when the price of the cryptocurrencies assets like Bitcoin or Ethereum becomes to drop at a rapid phase and liquidating all long leveraged trades which pushes the price of those assets even more in the downtrend.
Once the price falls drastically, users are worried and they want to get their funds out of the exchange so they trade, unstake or remove liquidity in order to cash their crypto into stablecoins or fiat in order to protect their portfolio from huge losses.
This is where the biggest issue starts to appear. Centralized exchanges are receiving huge withdrawals and the users’ crypto is already staked or into liquidity mining pools so they are not able to take it out in order to withdraw it to users’ requested withdrawal address. This is the part where they freeze withdrawals.
Once withdrawals are paused, this creates a huge panic among cryptocurrency users, they are wondering if their funds are really locked or the centralized exchange is going through a bankruptcy.
This is only increasing the panic among the crypto users and it even pushes the Bitcoin price even more as they are selling all of their assets in order to avoid the bear market.
This is Where Decentralized Exchanges Come to Play
Since decentralized exchanges don’t have this issue as users can keep their assets on their Web3 wallet addresses from providers like MetaMask, Magic, Trust Wallet and many more. They can easily connect their wallet address to the decentralized exchange and swap it for stablecoins or other cryptocurrencies.
Using a decentralized exchange can have a huge advantages over a centralized exchange when a bear market is around the corner. Some of those advantages are:
- DEXs doesn’t hold your crypto
- They are able to offer instant trade among thousands of crypto assets
- No paused or frozen withdrawals
- Easily unstake or remove liquidity from pools
This is the reason why decentralized protocols have millions of dollars locked in staking and liquidity mining, because it allows users to choose whenever they like to unstake or remove their assets from any pool without any penalties since unstaking early from centralized exchanges can cause you to pay penalties or receive no rewards for your staking order.
Now that we explained the advantages of decentralized exchanges, we can say that they are far better option for your crypto assets, not only in bear market but in the overall. They are able to offer instant, cheap, secure trades at any time without worrying about your trade not going through or if someone is gonna freeze your assets. With decentralized exchanges, your assets are not leaving your Web3 wallet address which is beneficial in both, bear or bull market.
Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.