We were recently retained to help a Crypto Exchange set up operations in the Caribbean, and this made us realise that we needed go out and learn more about this very innovative space. For the curious, we’d like to share this primer on Crypto Exchanges…

What is a Cryptocurrency?

Traditionally, the world has always used ‘fiat’ currency: dollars, euros and pounds that are government-backed and exchanged for goods and services. The first digital currency was created in 1983 and was known as eCash. The name ‘cryptocurrency’ comes from the encryption used to make digital transactions, making them more secure than un-encrypted transactions.

In 2009, Bitcoin was created. We’ll use Bitcoin for most of our examples as it was the first blockchain-based cryptocurrency as well as being one of the most popular today. At the time of writing, 1 Bitcoin is worth in excess of US$60,000. Anyone lucky enough to have purchased Bitcoin in February 2011 would have been able to buy it for as little as $1.

Before owning any cryptocurrency, you need to have an account, which is known as a wallet. Transfers and exchanges are made by using public keys and private keys, often eliminating the need for third parties such as banks or credit providers. This also allows users to avoid having to pay sometimes expensive transfer fees.

What is a Crypto Exchange?

By 2020 there were over 5,000 different cryptocurrencies. As with fiat currencies, not every cryptocurrency has the same value. We’ve seen how Bitcoin has rocketed in trading value in the last decade but this need not stay the case, and the valuation of digital currencies fluctuates just as it does for fiat currencies, though potentially with much wider swings.

Aside from cryptocurrencies -like Bitcoin, Ethereum, and Litecoin- there are also altcoins -such as Ripple and Stellar. Not all accounts (wallets) will accept every type of cryptocurrency, and so you might need to use a Crypto Exchange platform to convert or trade digital currency into the coin you need in order to convert the funds back to a regular fiat currency.

As we first mentioned, the world of Crypto can be exciting but it’s essential to gain a good understanding of the associated advantages and disadvantages. Note too that, in some parts of the world, cryptocurrencies are subject to tax and in others, they are illegal.

Advantages and disadvantages of Crypto Exchanges

There are important advantages and disadvantages to Crypto Exchanges depending on whether you are going to look into a centralized or decentralized exchange. A centralized Crypto Exchange is when a third party acts between the buyer (known as the maker in the trade) and the seller (the taker). Coinbase and GDAX are examples of centralized Crypto Exchanges. A decentralized Crypto Exchange doesn’t require a third party; favourite choices here include AirSwap and Blocknet.

Let’s go into more detail on the relative pros and cons of both versions, starting with centralized Crypypto Exchanges:

It’s great for beginners

Because its user-friendly, a centralized Crypto Exchange is ideal for those who are keen to take the first steps into crypto investments. All you need is an app or website to carry out transactions and view your account.

It’s more dependable 

For new investors and the more experienced, security is always going to be a concern. With a centralized Crypto Exchange, you can benefit from an additional layer of security. As the platform is centralized, it can be more comfortable for the user and generally more reliable.

Fraud and theft

With approximately $201 billion worth of cryptocurrencies, it’s possible for large centralized crypto exchange platforms to hold millions, if not billions of dollars in cryptocurrency. This makes it an attractive option for cybercriminals.

Transaction fees

Small transactions might not incur larger fees but, when you start making larger exchanges, the fees associated with centralized crypto exchange can be painful.

Let’s now look at the main advantages and disadvantages of using a decentralized Crypto Exchange:

There’s less chance of hacking

Using a third-party means you have to assume its security is built to withstand hacks. If not, you have a problem. As decentralized Crypto Exchanges don’t use third parties, you remove this hacking possibility.

There is more privacy

Transactions of a certain amount (fiat and digital) often require the completion of a Know Your Customer (KYC) form. This form contains personal information and a regular verification process. You don’t need to complete a KYC with decentralized Crypto Exchanges.

Prevention of illegal activities

Decentralized transactions are peer-to-peer and so there is no room for things like market manipulation or round-trip trading (buying and selling the same financial asset at the same time).

It’s more complicated

You need to remember various keys and passwords or risk writing them down. If you can’t remember the access codes to your wallet, you won’t be able to recover your digital currency. The process of Crypto Exchange is also more complex and will require more knowledge.

You can’t trade in fiat currencies

With a decentralized Crypto Exchange, you can only trade and exchange in cryptocurrency. This means it’s only suitable for those who have an alternative method to convert fiat currencies to digital currencies, and vice versa.

A smaller trading volume

It’s estimated that 99% of Crypto Exchange occurs through centralized transactions. With less volume, you might find a lack of liquidity, making It more challenging to find makers and takers.

In concluding, investing or trading in cryptocurrencies can be intimidating at first, not helped by news about scams and people losing money and the foremost concern when trading will be safety and security. That said, whilst this is a risk, it has never been so simple to invest and trade safely in cryptocurrency as it is today.

#cryptojobs #cryptocurrency #offshorecrypto

See also: Quant Trading | What You Need to Know

If you want a job offshore, visit our jobs portal to see the latest vacancies. Are you starting a Crypto Exchange? Visit our Client Services page to see how we can help.