Cryptocurrency trading: CFDs, market exchanges
Cryptocurrency exchanges are online platforms that allow a trader to exchange one cryptocurrency for another cryptocurrency (or fiat currency). In other words, and depending on the exchange, we're either referring to a stock exchange or a currency exchange.
These exchanges are the entry point for investors who want to get in on the cryptocurrency scene. But not all exchanges provide the same services and it is important that one understand the distinctions between the various types of exchanges.
Are you an institutional trader or an independent trader? Are you looking for an anonymous or a fully regulated trading platform? Are you looking for derivative products?
Cryptocurrency exchanges
Cryptocurrency exchanges operate just like traditional stock market. They allow cryptocurrencies to be exchanged between themselves; some exchanges also allow users to exchange cryptocurrencies for fiat currencies such as the dollar or the euro.
There are two types of cryptocurrency exchanges: Centralised EXchanges (CEX) and Decentralised EXchanges (DEX). Centralised cryptocurrency exchanges require their users to deposit their funds on the platform before they can trade, while decentralised exchanges are designed in such a way that users retain control of their funds at all times.
It is important to note that cryptocurrency exchanges - whether centralised or decentralised - are not subject to the same regulations as other types of asset exchanges. Entities that describe themselves as cryptocurrency exchanges are very similar to regulated financial exchanges, however, even the largest cryptocurrency exchanges have a number of significant differences in terms of the management of client funds, the transparency of transaction execution, transaction reports and verification, regulatory monitoring and risks.
Centralised exchanges (CEX)
Also known by the name CEX, centralised cryptocurrency exchanges are similar to traditional stock exchanges. Buyers and sellers come together and the exchange acts as an intermediary.
Each centralised exchange has its own system for holding users' assets and this often poses a problem relating to vulnerability to piracy, since a lack of transparency regarding cybersecurity practices, security audits and server locations can lead one to question the security of a centralised exchange.
Centralised exchanges that do not provide their users with the opportunity to exchange fiduciary pairs often have lower fees than those that do. In addition, many centralised exchanges charge a fee for withdrawals.
The often ambiguous regulation of cryptocurrency trading raises a number of legal and compliance issues, including the fact that centralised exchanges maintain their own transaction records. However, there are advantages, since customer information cannot be viewed in the public blockchain. Nevertheless, this also means that clients cannot easily see proof regarding their transaction's execution or their balance.
Another major problem with centralised trading is the lack of transparency regarding market makers. Many stock exchanges add market makers who are basically only there to inflate purchases, sales and cross-trades.
For beginners testing the various types of cryptocurrency exchanges, it may make more sense to start with an exchange offering fiat/crypto pairs. This is precisely why the market exchanges that provided this service in 2017 and 2018 have become among the most popular today.
Decentralised exchanges (DEX)
The decentralised cryptocurrency exchanges aim to remain faithful to the cryptocurrency sector's philosophy. A DEX does not rely on an intermediary to hold your funds. It is a market where buyers and sellers meet and process transactions directly with each other.
Decentralised exchanges are encrypted exchange markets and are therefore difficult to hack. They do not depend on a third party to store their users' funds. In other words, when you use a decentralised exchange, you remain the sole holder of your cryptocurrencies; this is unlike centralised exchanges that require you to deposit your funds with a third party before you can start trading.
In addition, decentralised exchanges do not enable traders to exchange fiduciary currencies for cryptocurrencies.
Because decentralised exchange centres do not store their users' funds in a centralised location, they are generally considered safer than their centralised counterparts. However, the technology behind decentralised exchanges is not yet mature and, in any case, it will always be necessary to attract buyers and sellers to ensure liquidity.
CEX vs DEX: which is the best cryptocurrency exchange model?
A debate is currently underway regarding the benefits of decentralised exchanges compared to centralised exchanges. One thing is clear: centralised exchanges are much faster and they are cheaper to operate. They do all their transactions in the backend of a database instead of doing them within a blockchain. Transactions are therefore much faster and exchanges are more liquid.
Although liquidity is generally attributed to centralised platforms, the latter are notoriously exposed to security and piracy problems.
Right now, we are seeing a surge in the popularity of decentralised exchanges. "Binance" has recently released an beta version of its decentralised trading system to provide a more secure solution for traders. Decentralised exchanges are considered more secure because they are configured to allow users to retain ownership of their assets using private encryption keys.
CEX - Centralised cryptographic exchanges:
- There is a third-party operator through which funds are sent during a transaction
- Fiat currency transactions are allowed
- Market Makers are part of the platform
- Public blockchain: entries are in the database until the withdrawal is made
- The transaction volume will be greater
- Faster transactions (no update of the blockchain in real time)
- Liquidity is better
- Solid information on clients and anti-money laundering practices are used
- Private encryption keys are stored in the system and linked to the user's credentials
- Subject to piracy
- Regulated by governments
- Transaction fee: 0.15% to 5%
DEX - Decentralised cryptographic exchanges:
- No third-party operator through which funds are sent during a transaction
- Fiat currency transactions are not allowed
- In general, Market Makers are not part of the platform
- Private blockchain: transactions are encrypted. No entry in the database.
- Transactions can be slower (update of the blockchain in real time)
- Liquidity is lower
- Client anonymity, no anti-money laundering practices are used
- No private encryption keys are used in the application
- Difficult to hack
- No government regulation
- Low or no transaction fees
Cryptocurrency CFDs
The recent surge in popularity and public awareness of cryptocurrencies has resulted in a growing number of trading platforms offering access to the cryptocurrency markets. In particular, a large number of brokers have started offering "contracts for difference" (CFDs) on a number of crypto-currencies.
So what exactly are cryptocurrency CFDs, how do they work and what are the risks?
What is a cryptocurrency CFD?
A CFD is an agreement based on an underlying asset, usually a stock, an index, a commodity or a currency pair. With CFD trading, you never actually own the asset, you simply bet on the increase or decrease in the price of a cryptocurrency versus a fiduciary currency, but some brokers also offer crypto/crypto CFDs, such as BTC/ETH.
With a cryptocurrency exchange, investors buy and sell cryptocurrencies, keeping them for a while in the hope that their prices will rise. This is a simple and straightforward way to make profits on rising cryptocurrency prices. Transactions can be done on both centralised or decentralised trading platforms.
CFDs offer a different and more complex way to trade cryptocurrencies, as they enable a trader to profit in both rising and falling markets with 2x leverage.
Benefits of cryptocurrency CFDs:
- Leverage amplifies profits
- You can trade cryptocurrencies without owning them
- No need to open an encrypted storage portfolio or manage cryptographic exchanges
- You can profit from both rising and falling markets
- Easy to use with fiduciary money
- You can trade on regulated platforms
Potential risks:
- Leverage amplifies losses
- You could potentially lose a lot more than the amount you deposit
- Not suitable for long-term trading
- Cryptocurrencies are highly volatile and speculative
- CFDs are highly speculative
Comparison of cryptocurrency trading platforms
 |  | |
|---|---|---|
| Headquarters | UK / Nevis | Hong-Kong / Malta |
| Licence | FCA, FSPR, ASIC |  |
| Type of exchange | Fiat <> Crypto Crypto <> Crypto | Crypto <> Crypto |
| Cryptocurrencies | 43 | 200+ |
| CFDs |  |
|
| Transaction fees | 0.5% | 0.10% |
| Withdrawl fees | Variable | 0.001 bitcoin |
| Payment methods | Bank transfer, Neteller, WebMoney, Skrill, Cryptocurrencies | Cryptocurrencies |
| FXOpen (our review) | Binance (our review) | |
 |
|
 |  | |
|---|---|---|
| Headquarters | United Kingdom | UK |
| Licence | FCA | FCA |
| Type of exchange | Fiat <> Crypto Crypto <> Crypto | Fiat <> Crypto Crypto <> Crypto |
| Cryptocurrencies | 7 | 11 |
| CFDs | | |
| Transaction fees | 1.49% to 3.99% | 0.5% to 1.5% |
| Withdrawl fees | 0 to €0.15 | 3.50€ |
| Payment methods | Bank transfer / credit card / Cryptocurrencies | SEPA bank transfer, credit card, Skrill |
| Skrill (our review) | ||
| |