Understanding the centralized as well as decentralized exchanges along with trading.
Introduction
Crypto exchanges have been proved to provide enough liquidity and maturity to the overall cryptocurrency market though 90% of all the Crypto exchanges are centralized in nature. This centralization of cryptocurrency exchanges is against the decentralization concept of the cryptocurrencies.
Centralized exchanges are ones where all the authority is vested with a single person and is highly vulnerable to cyber attacks and hacks. A user needs to comply with a number of Identity verification process by providing the required documents and in turn, provides lesser privacy. In case of a centralized cryptocurrency exchange, there is already been a witness that they are open to a number of hacks and might face server downtimes due to high traffic inflow. The exchanges support conversion of cryptocurrencies into Fiat currency and even have trading pairs between them. Additional features like a digital wallet, crypto Debit cards, etc are available.
Decentralized exchanges are nothing but peer-to-peer exchanges where the authority is distributed among its participants with no single point of failure hence are lesser are safer when compared Centralised Crypto exchange but the decentralized crypto exchanges are not that popular. The user usually need not provide any personal documents since the exchange provides high levels of anonymity. A decentralized cryptocurrency exchange has either of no hack experienced till now along with no server downtimes. The trading pairs are only between cryptocurrencies, no fiat trading is possible. Its features are limited to only a handful of them.
Trading pairs
A trading pair generally refers to the seamless trades that one can undertake between two currencies. The currencies can either be cryptocurrencies or fiat currencies. BTC/LTC, ETH/BCH, etc are some of the examples of cryptocurrency trading pairs. Whereas ETH/ USD, BTC/EUR, LTC/INR, etc are some of the popular fiats with crypto trading pairs. Centralised exchanges support both Fiat currencies and cryptocurrencies for the trading pairs but in case of decentralized exchanges, conversion is possible only between the cryptocurrencies.
Different trading prices for exchanges
The most prominent reason that can be quoted for the difference in the prices of the trading pairs on different exchanges is the real-time demand and supply of that particular cryptocurrency. As the cryptocurrencies are not related to a single exchange the value of cross different exchanges with respect to any other currency keeps fluctuating due to the demand and supply in that particular region at that particular time. This discrepancy in the values of the trading pairs can be taken advantage of, by a daily trader in order to gain some profits.
Gain profits through this difference in price
Arbitrage is the precise term used for the process of gaining profits through the difference in the prices on different cryptocurrency exchanges. user sells his cryptocurrency on the exchange where the value is higher and buys the same amount of cryptocurrency on another exchange where the price is lower, hence has the same amount of cryptocurrency but has made some profits due to the differences in the prices on different exchanges. Triangular arbitrage is a higher level of making advantages in price discrepancies among three currencies rather than two. Here the transaction time must be instantaneous, in order to avoid price slippage. If cryptocurrency exchange takes a long time to confirm the transaction then this method might not prove to be profitable, as the prices might have consolidated.
Start trading
In order to start trading with a cryptocurrency, a user needs to register himself on the exchange by providing the necessary details and also enabling the two-factor authentication. Post which the user needs to deposit some funds through bank transfer. Once the funds are available on the account the user can start trading and the basic trading principal says, buy low, sell high. It is highly advised to move all your cryptocurrencies out of the exchange once the trading is done as they are highly vulnerable to cyber attacks.
