Why do investors choose centralized exchanges over decentralized exchanges?

Centralized exchanges open several market options

  • Centralized exchanges offer enhanced liquidity
  • Centralized exchanges provide Better access to derivatives
  • Centralized exchange more comprehensive access to digital currencies for everyone

Centralized exchanges are a platform that enables investors to buy and sell cryptocurrency either for fiat currency like the U.K. Pound or the U.S. Dollar or between digital assets like Bitcoin or Ether. In other words, they function as trusted intermediaries in trades and often act as custodians by storing and protecting your funds. Any centralized digital currency opens several market options and provides it to the trader via a custodial type of account. An intermediary takes hold of the assets only briefly to convert them from one form of asset to another.

The centralized digital currency exchange aggregates a lot of market options. It provides them to the end-user (the trader) by linking markets, tools, and resources to offer value to the trader. A centralized exchange negates the need for understanding or knowing the complexities of blockchain technology. It enables complete access to digital currencies for everyone.

On the other hand, a decentralized exchange for digital assets will be like a currency swap and will not involve a third party. Thus, it would seem like a simple exchange of one blockchain smart contract for another. However, instead of the centralized exchange verifying the transactions, the transaction is automatically verified by the respective parties and their observance of the transaction.

Experts call this “consensus-based verification.” It can be compared to marriage, and a ceremony certificate is not needed as the crowd of attendants verifies the marriage.

Benefits accrued from a centralized digital assets exchange

Centralized digital assets exchange offers an array of trading opportunities and is often termed market multipliers. The exchange offers hundreds of trading pairs and enables any investor with any crypto assets to convert it into a wide range of choices – Bitcoin and Ethereum, various altcoins, and other products, such as derivatives. Hence Centralized digital assets exchange broadens the available trading options.

Enhanced liquidity

The ease in the conversion of a digital currency into another currency is known as liquidity. High liquidity means the digital currency can be easily converted, and there are many buyers and sellers. As a result, a stable marketplace is created, and prices remain steady.  

Centralized exchanges are endowed with higher liquidity due to narrow bid-ask spreads. The small spread drives further volume and which in turn affords additional liquidity. High liquidity also preempts the chances of market manipulation since fraudulent orders would be much harder to place.

Better access to derivatives

The derivative market for digital currencies is booming. Investors have a choice of specific futures to invest their money in, and it includes Bitcoin Futures and Bitcoin Options menus. Such transactions are not possible with common decentralized platforms.

In a Decentralized exchange, there is no centralized party controlling all the transactions directly, just like the open-source movement in software. The decentralized exchange also has relatively limited services to offer. Developers who try to bypass vendor licensing by searching for open source resources quickly discover that they have to put in more toil. Also, open-source resources offer no vendor support; licensed tools have vendor support, and clients enjoy and rely on that support. Something similar also happens with centralized digital asset exchanges. Centralized digital asset exchanges give investors enhanced services, things that investors cannot do by themselves or have found it challenging to do alone.

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