A cryptocurrency exchange is a platform online where one cryptocurrency can be exchanged for another or for fiat currency. And, that’s quite simple to grasp.
Understanding the existing models that different types of cryptocurrency exchanges operate is where most people get lost. If you are new to all of these, you may have wondered what the existing models are, which one of these models provides the most benefits and which is the perfect fit for you.
In this article, we’ll be taking a look at the different types of cryptocurrency exchange models. We’ll also be looking at some of the pros and cons of trading on the different types of cryptocurrency exchanges.
Inside this article:
The Over The Counter Exchange (OTC)
The Peer to Peer Exchange
The Instant Exchange
On the instant exchange (Instant buy and sell), you simply place an order to buy or sell and the instant exchange fulfils your order in a few seconds. The instant exchange acts as a broker, meaning that you are buying (or selling) directly from the exchange at the current market price at the time of the transaction.
Pros
Trust: Because you are dealing directly with a reliable exchange, there are way fewer risks involved. You can trust the exchange with your funds.
Instant: The buy/sell transaction is executed quickly and orders are fulfilled in a matter of seconds.
You get what you request: The amount you request to buy/sell is exactly what you receive.
Safety: You are dealing directly with the exchange. Hence, eliminating the concern of your funds being carted away.
Cons
Fees: The fees for an instant exchange are higher compared to an Over The Counter exchange or the peer-to-peer. But, fees vary depending on the exchange you are using.
The Order Book Exchange
An order book is an automated digital list of buy and sell orders for a given cryptocurrency. This exchange type is run on more sophisticated cryptocurrency exchanges. There’s quite a lot of technicality required to build this exchange, hence, it’s a great deal to pull off.
Order book exchanges usually have both a market and limit order. The market order lets you buy and sell at the current price. While the limit order allows you to set the order at the price you want to buy or sell. Your buy order, for example, is automatically fulfilled when there’s a sell order that matches your order.
Beyond cryptocurrency, the order book is used for various financial assets including stocks, bonds and currencies.
Pros:
Trust: The order book exchange provides a secure platform for buyers and sellers to carry out transactions.
Low Fees: Compared to the instant exchange, the fees on the order book exchange are less.
Set the price you want: Using the limit order you can set your buy/sell price then leave it to the automated system to fulfil your order when it finds an order that matches yours.
Orders get fulfilled faster if liquidity is high: If the order book exchange you are trading with has good liquidity, your order would be fulfiled fast.
Cons:
- Fulfilled orders could be slow if liquidity is low: If the liquidy on an exchange’s order book is low, then that means that orders would be fulfiled at a slower rate.
The Over The Counter Exchange (OTC)
In this type of exchange, two people trade directly with each other. The person who is looking to buy connects with the person who is looking to sell on this exchange and a transaction is carried out. This exchange has no physical location. Both parties use diverse modes of communication including email, phone calls and chats. There are few regulations in this market type.
Sometimes, a number of OTCs are run through channels like Whatsapp groups.
Pros
Set Your Price: You decide what price you want to buy or sell for.
Low fees: Fees on an OTC are relatively low. Depending on the case you might just be paying the fees for sending cryptocurrency.
Cons
Risk Involved: The over the counter exchange is quite risky. This is partly because it is the exchange model that is least regulated. An OTC exchange can begin operations in as simple as a Whatsapp or Telegram group.
Scam records: Of all the different exchange types, OTCs have the highest number of scams recorded.
Longer trading times: It takes a longer time to trade on an OTC as opposed to an instant exchange or an order book exchange. The reason for this is that the seller has to wait for funds to be sent before the cryptocurrency is transferred. Different factors such as bank issues could kick in within the span of these two simple actions to make transactions longer.
The Peer-to-Peer Exchange
The peer-to-peer exchange is mostly similar to the OTC exchange. Like the OTC, the peer-to-peer exchange allows traders to connect with one another and perform transactions without the intervention of a third party. On the peer-to-peer exchange, traders list their buy and sell orders on the designated section for each one. The orders get fulfilled when another trader shows interest, to either buy or sell, on the order placed. The peer to peer exchange simply acts as an escrow by ensuring that all the parties involved live up to their commitments in order to curtail fraudulent activities.
Pros
Low fees: Becuase traders are trading directly with other individuals, trading fees are less.
Privacy: On a peer-to-peer exchange, you don’t have to provide as much information as is required in an order book or brokerage model exchange for instance. These other exchange types are registered with the government they operate in and have to fulfil certain regulations which make them want to have as much information (i.e KYC) about their users as possible. When you look at this from another angle, though, having enough information about users aids for more secure exchange.
The Escrow: The peer-to-peer exchange acts as an escrow which makes it a safer model compared to the OTC. The escrow holds the cryptocurrency until the seller confirms that s/he has been paid by the buyer. The escrow releases the cryptocurrency to the buyer as soon as the seller confirms payment.
Cons
Risk: Even though it comes with much lower risks compared to the OTC, the peer-to-peer exchange still poses more risks when placed side by side with the brokerage and order book exchange. In the peer-to-peer, a seller could choose to not confirm payment after the buyer has paid which means that the buyer would be unable to access the digital asset and the seller could still walk away with both the digital asset and funds.
Longer trading times: This is because traders have to wait for the fiat currency to be sent and the digital asset to be transferred before a transaction is fulfiled.
