Introduction
The support information in this guide is intended to provide an overview of some of the differences between methods for trading cryptocurrencies, including those trades logged in the Trading Diary by Crypto Hunter and Basel for Blockcircle Members.
The exact methods demonstrated in our guides are subject to change as the CEX and DEX services are frequently updated, but we will aim to provide you with the background knowledge and links you will need to feel more confident accessing these different options for your trading.
Important Note: Where any specific cryptocurrencies or products are demonstrated in this knowledge base, it does not constitute an endorsement or recommendation for you to undertake any behavior or activity. It is important that you completely explore this knowledge base and understand the risks and take on the responsibility to make the best decisions for you and your individual investment situation at all times, including speaking with an accredited Financial Advisor relevant to your region. This knowledge base does not offer a complete guide and you are encouraged to explore as many resources as possible to help you with your decision making. If you are unsure at any point, the Blockcircle Team is always available to assist you to answer the questions you may have.
Cryptocurrency Trading Methods
Below is a summary of the most common methods for trading cryptocurrencies to cryptocurrencies:
CEX
C-E-X’s or Centralized EXchanges, are websites (companies) who provide registered users with access to methods for obtaining cryptocurrencies (ie. from fiat) and for trading one cryptocurrency for another cryptocurrency in an organized way.
Different CEXs provide a range of options for their customers ranging from simple, for example, issuing a “wallet address” for deposit, providing a trading account, showing a price chart with order book, a UI to draft and submit orders, and options for withdrawal of purchased assets, to complex, for example, margin and futures trading, credit card purchases of cryptocurrency, staking, pooling, vaults, liquidity provision, swap farming, trading NFTs, trading bots, API access, etc.
Some examples of well-know CEXs are; Coinbase, Binance, Kucoin, OKX, Kraken, Bitstamp, Bitfinex, WooX, Gemini, Huobi, Bittrex, and so on.
We find that most traders have a wide range of CEX accounts registered. However, it is important to realize that when users deposit funds or trade cryptocurrencies, the company takes custody of the trader’s funds until they are withdrawn and given back to the user.
The cryptocurrencies will leave the trader’s ‘real’, blockchain based wallet, exit the blockchain and be deposited directly into the CEXs wallet. Should that CEX fail as a business and enter bankruptcy, be subjected to a major hack or other security breach, or simply choose to disable withdrawals to prevent a cascading collapse (events that have happened many times in the industry already), the trader is left with lengthy, legally complex options to try to recover all or only some of their funds, if they are successful at all.
The common saying is “not your keys, not your crypto”, referring to the exchange of custody of your funds from you to the CEX when you make a deposit. However, for novice traders following the rules of a robust, trustworth CEX could be of assistance in learning ‘the ropes’ of trading.
You may find it useful to explore the Pros and Cons of each trading method below for more information.
DEX
A D-E-X or Decentralized EXchange is also a website (and more recently Apps) that provide traders with methods for exchanging cryptocurrencies for other cryptocurrencies, such as exchanging USDT tokens for Ethereum tokens.
Some examples of well-known DEXs are; Uniswap (Ethereum), Sushiswap (Ethereum), PancakeSwap (BSC) Jupiter (Solana), Camelot (Arbitrium), ALEX Labs (Stacks).
The majority of DEX services/websites/Apps fall into 2 categories:
- Automatic Market Maker (AMM) – websites like Uniswap are automated to provide a liquidity pool which automatically swaps between 2 tokens in a pair, eg. ETH/USDT, each swap performed alters the balance of tokens, for example a buy of ETH will deposit USDT and remove ETH from the pool, which changes the price, based on changes in demand. Unlike with a CEX, the transaction is performed and recorded directly on the blockchain and no centralized authority controls the market between traders.
- DEX Aggregator – aggregators, like Jupiter, query all known available DEXs with appropriate liquidity pools and they claim to provide the trader with the best price and lowest fees available for their selected trade by selecting the option/s with the best outcome for the trader (ie. more of the tokens being purchased). The same pros and cons exist as ultimately, an AMM service is still providing the trade and fulfilling the trading order.
Traders who tend to prefer DEX trading like to have direct control over their funds, leverage on-chain analysis and trading opportunities and want to have early access to highly speculative, high risk investment options. They may want to avoid CEX trading for a number of reasons including to keep their identity anonymous, although the transactions are typically public.
The majority drawback of DEX trading is complexity. Traders using DEXs should be knowledgeable about liquidity pools, research their investments and current liquidity options thoroughly, and should be prepared to take full responsibility for the highly speculative form of investing/trading.
P2P
Peer-To-Peer trading is another decentralized method of trading cryptocurrencies for other cryptocurrencies that was available prior to AMM services. Known as trading platforms, websites offering P2P trading methods assist to provide an intermediatory, essentially similar to an escrow service. Traders will set a price to sell or a price to buy, and wait for another individual to commit to the trade.
DEX services tend to be far more convenient as the liquidity pool already has tokens available, and only the price needs to be set.
OTC
Over-The-Counter (OTC) trading involves brokering a deal directly with a source of cryptocurrency tokens. This may be for fiat or cryptocurrency. OTC trading comes with some benefits, most of which apply to high value trades, eg. $50,000 or more.
There are several risks to OTC trading which won’t be covered extensively in this guide. Members seeking OTC trades should engage in a lot of research before making any commitments.
Pros and Cons
CEX
Pros
- Websites often provide guidance and educational resources for newer traders
- Liquidity for listed pairs is often quite good
- Fees for basic trading tend to be reasonable for entry-level traders
- KYC (know-your-customer) requirements automatically apply restrictions based on your region and attempt to ensure compliance with regulations from your region
- Ostensibly a cryptocurrency being approved for listing and provision of liquidity suggests it may be legitimate (although see Cons below)
Cons
- Once you transfer fiat or crypto into your CEX account, you no longer have custody of that asset and you rely on the website/company to manage the security of those funds
- Additionally KYC requirements often involve you providing highly sensitive documents and information that you no longer control once saved in their database
- Historically owners and top level executives of CEXs have been found to engage in criminal conduct involving using user funds in their custody
- CEXs are large targets for hackers
- New listings are costly and paid for by the owners of the cryptocurrency project meaning CEXs could be incentivised to ignore “red flags” about the longevity and investment potential of a cryptocurrency
DEX
Pros
- Enhanced security: Less risk of hacking.
- User privacy: Anonymity, no KYC required.
- Control over funds: Users hold their private keys.
- Resistant to price manipulation, but could experience extreme price slippage on illiquid trading pairs.
- No single point of failure and globally accessible.
- Quick to list new cryptocurrencies.
Cons
- Lower liquidity: Fewer trading volumes.
- Less user-friendly: Limited features and complex interface.
- Slower transactions: Reliant on blockchain confirmations.
- Limited customer support.
- Compatibility issues with different assets.
- Smart contract vulnerabilities.
- Limited regulation: Less consumer protection.
