How to Buy and Trade Crypto
Discover the basics of buying, selling, and trading cryptocurrencies.
For many, the crypto world is mainly about making money. Currently, almost everybody enters the crypto industry to make profit out of one token or another. As such, every investor needs to buy, exchange, or trade these cryptocurrencies. In this article, we’ll cover the ways of buying and trading crypto.
There are four main methods for purchasing cryptocurrencies:
- Centralized exchanges (CEX) such as Binance, KuCoin, Gemini, etc.
- Decentralized exchanges (DEX) – web interfaces for swapping tokens by means of smart contracts
- Exchanging currencies with the use of crypto wallets
- P2P – the easiest to understand method of exchanging crypto. It is the interaction between users directly or by use of an intermediary (p2p-platform as a guarantor).
Let’s explain each of the above methods in detail.
CEXes are full-fledged web and app interfaces with many services to work with including: buying, converting, p2p exchanges, lending, staking, NFT’s, and so on. On large crypto exchanges such as Binance, there are whole ecosystems with multiple options to work with. In order to be able to work on a CEX, you need to go through KYC and upload your personal documents to that exchange.
Advantage of CEXes:
- A huge range of instruments to trade, from fiat money currency pairs to the most exotic ones
- A variety of different services apart from trading
- Convenient ways to deposit and withdraw funds with many payment systems and wire transfer supported
- Specialized charting for more convenient trading
- The need to go through KYC
- As a result, you can’t remain anonymous on CEXes
- By trading on CEXes, you transfer your money to the exchange’s wallet and store it there. In fact, you do not have full control over your funds.
Decentralized Exchanges (DEXes)
Unlike centralized exchanges, decentralized exchanges do not have intermediaries such as owners of websites, services, etc. On DEXes, every transaction is made with the help of smart contracts, i.e. special programs that connect buyers and sellers of cryptocurrencies. Smart contracts are open source software. Their work doesn’t depend on anybody and is not controlled by anyone. That means you don’t send your crypto to anyone’s wallet when trading on DEXes, keeping your funds under your own control.
The advantage of DEXes over centralized exchanges is that DEXes don’t require you to register an account and upload your personal docs to have them verified. All you have to do is just connect your wallet to the exchange’s smart contract after you open the exchange’s web interface.
As such, you can remain anonymous when making transactions which is a major advantage of DEXes. Another good thing is that every transaction on a DEX is a “true” one, meaning you instantly receive coins to your wallet and not just see digits in a web interface.
For exchanging crypto in their wallet, the user pays a gas fee which is the payment for making transactions on a particular blockchain.
On the other hand, there are a number of cons to using DEXes:
- Generally, there are less instruments on DEXes compared to CEXes
- Most often, DEXes don’t have a graphic interface with chart options
- There are usually less services on DEXes compared to CEXes: lending services, staking, p2p trading, etc.
- You cannot withdraw your funds into fiat money as such exchanges work with crypto only
- There is a (theoretical) possibility of smart contracts being compromised and your funds are stolen.
It is also worth noting that you can’t store crypto on DEXes as they are essentially smart contracts for making operations and not wallets for storing cryptocurrencies.
MetaMask, Brave, Exodus, Trust Wallet, Trezor Wallet, and Ledger are examples of crypto wallets. They can be in the form of a browser extension, stand-alone applications, physical devices, or web interfaces.
In essence, transactions in crypto wallets are completed the same way as on DEXes. When you swap a token for another one, your wallet connects to the exchange’s smart contracts and the wallet chooses the one that offers the best prices. In other words, the basic difference between crypto wallets and DEXes is that the user doesn’t have to open a web site or separate services – all operations can be done within the wallet’s interface.
Crypto wallets lose out to DEXes in the sense that the latter have at least some kind of graphic interface to choose currencies for trading while with wallets, you need to enter the address of your second crypto in the pair manually. As for the rest, crypto wallets feature similar pros and cons as DEXes do. By the way, you cannot exchange crypto to fiat money when using wallets as they are designed to work with crypto only.
P2P, or peer to peer, is a type of exchange between users. Here, you can exchange your coins with users directly and choose an intermediary as a guarantor. Direct exchange is when you find a person to make a deal with, transfer your fiat money to him/her and receive cryptocurrencies in return, or vice versa. It is worth noting that you need to trust your counterparty which is not always possible to achieve. This is the main disadvantage of this kind of exchange.
Exchanging with an intermediary is when you use special P2P platforms with an intermediary. When a buyer initiates a trade, the seller first transfers their crypto to the platform’s escrow account where they are stored until the buyer’s money gets to the exchange’s account.
As soon as the funds are credited, the coins are sent to the buyer’s crypto address without the seller involved. Among P2P platforms there are the following ones: LocalCoinSwap, Paxful, LocalBitcoins, Hodl Hodl, etc. Apart from them, many CEXes offer P2P exchange services as well. For example, there is a P2P service on Binance.
The main advantage of this type of exchange is the ease of entering the crypto world for those who don’t have crypto currencies yet or lack an opportunity to receive crypto into their wallet. Furthermore, this kind of exchange involves a guarantor in the person of the platform itself who guarantees execution of the deal. As such, this type of P2P exchange bears lower risks compared to direct exchange between users.
The main drawback of this method is the extremely poor choice of cryptocurrencies to trade. In fact, P2P platforms offer 1 to 10 tokens for exchange, including stablecoins. You can’t expect to see rare or little-known coins on such platforms, not to mention NFTs.
In this article, you got acquainted with ways of trading and exchanging cryptocurrencies. Before making your choice, you should consider what your goals are and move forward from there.
It doesn't hurt to experiment with different options, but do not put yourself into a compromising situation or refinance your home in order to invest in crypto assets.
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.