Advantages and Disadvantages of Centralized Cryptocurrency Exchanges
1. User-friendly
Centralized exchanges offer beginner investors a familiar, friendly way of trading and investing in cryptocurrencies. As opposed to using crypto wallets and peer-to-peer transactions, which can be complex, users of centralized exchanges can log into their accounts, view their account balances, and make transactions through applications and websites.
2. Reliable
Centralized exchanges offer an extra layer of security and reliability when it comes to transactions and trading. By facilitating the transaction through a developed, centralized platform, centralized exchanges offer higher levels of comfort.
3. Leverage
One of the other benefits of certain CEXs is the option to leverage your investments using borrowed money from the exchange, called margin trading. It allows investors to reap higher returns, but losses can also be amplified.
Disadvantages of Centralized Cryptocurrency Exchanges
1. Hacking risk
Centralized exchanges are operated by companies that are responsible for the holdings of their customers. Large exchanges usually hold billions of dollars worth of bitcoin, making them a target for hackers and theft.
An example of such an incident is Mt.Gox, which was once the world’s largest cryptocurrency exchange company before it reported the theft of 850,000 bitcoins, leading to its collapse.
2. Transaction fees
Unlike peer-to-peer transactions, centralized exchanges often charge high transaction fees for their services and convenience, which can be especially high when trading in large amounts.
3. Custody of digital assets and risk of fraud
Lastly and most importantly, most CEXs will hold your digital asset as a custodian in their own digital wallet rather than allow you to store your private keys on your own digital wallet. While more convenient when you want to trade, there are drawbacks, namely the risk of the centralized cryptocurrency exchange failing and fraud.
Recent examples include the failure of the 50 USD billion algorithmic stablecoin TerraUSD and sister token Luna, the bankruptcies of hedge fund Three Arrows Capital, lender Celsius Network, broker Voyager Digital and the sudden collapse of FTX and Alameda Research.
