Even if you haven’t invested in cryptocurrency yet – or don’t know what it means yet, at least not completely – you have definitely heard about cryptocurrency because of all the buzz and hype around it.
Decentralized exchange meaning
Just like stocks are traded on a stock exchange, and currency is traded on currency exchange, cryptocurrency is traded on a cryptocurrency exchange.
There are two types of cryptocurrency exchanges – centralized and decentralized. However, wouldn’t it make more sense to trade decentralized cryptocurrency on a decentralized exchange?
After all, cryptocurrency is all about decentralization. Let’s revise what cryptocurrency is to get the ball rolling in favour of decentralized crypto exchanges.
Cryptocurrency: recap and brush up
Most currency is centralized in the sense that you need a bank to transfer the ownership of the currency from one person to another, especially in large amounts. We’re not talking about the Rs 21 that you pay to your rickshawala, but about the Rs 50,000 that Ramesh transfers – using his banking app or any other third party – to his travel agent for an airline ticket and much higher amounts.
Centralized currency needs a third party for the transfer of ownership and is always linked to fiat currency, or physical currency, like Indian rupees, Japanese Yen, or US Dollars.
Decentralized cryptocurrency, however, allows peer-to-peer transfer of coins or tokens. That means that you can buy Bitcoin from a total stranger for the equivalent number of Dogecoins. The transactions are secure and anonymous and just like any currency, the value of these currencies fluctuates continuously. However, cryptocurrency has no correlation with the stock markets and currency markets.
Now that these currencies are being seen as investment avenues, their values are rising at a much faster rate thanks to the scales being tipped by surging demand.
Cryptocurrencies are popular for three reasons:
- Rising value/ investment potential
- Supposed currency of the future
Cryptocurrency is banned in India in the sense that you are not allowed to use it to pay for anything. You can still invest in cryptocurrency, but it must be converted back to fiat currency for you to use it legally in the country.
Benefits of trading on a decentralized crypto exchange:
- Anonymity: Investors who choose cryptocurrency for its anonymity would be defeating the whole purpose by trading on a centralized crypto exchange because they would obviously have to register and go through a verification process and KYC SOPs.
- Security: Decentralised crypto exchanges are seen to be a more secure option since there is limited sharing of data with any third party. Additionally, the very setup makes it nearly impossible for hackers to break in.
- Affordability: Although this might duffer on a case-to-case basis, in general, a centralized exchange has additional overheads linked to customer service, sourcing customer data, and so on. These costs are passed on to the customer-investor.
Considerations when trading on decentralized crypto exchanges:
- Complexity: A centralized exchange develops a relationship with you and will therefore offer you guidance and resources when you are confused, or when you have questions, or if something goes wrong. One cannot expect this on a decentralized exchange, which most investors agree is also more challenging to navigate.
- End game: What’s your endgame when investing in cryptocurrency? The largest chunk of investors wants to clock good earnings (by waiting for the crypto that they are holding to rise in value) and then convert the cryptocurrency to a fiat currency that they can use to further their financial goals. Fewer people are buying cryptocurrency to use linked apps or pay for the handful of items that can be purchased using cryptocurrency. Moreover, you compulsorily have to convert your cryptocurrency investments to fiat currency because paying for anything using cryptocurrency is banned in India.
India’s decentralized crypto exchanges:
There are a set of decentralized crypto exchanges that are very popular in India this year. It might make sense to choose from any of these, if you are bent on a decentralized exchange because clearly, they work well in this market, for whatever reason.
Whether you trade on a centralized crypto exchange or a decentralized crypto exchange you must acknowledge the risks associated with cryptocurrency. As an asset class, cryptocurrency is practically the youngest. We have no idea how they will progress and which ones are likely to succeed (although Bitcoin is clearly the market leader at the moment) because we have insufficient historical data.
That said, many investors have earned substantially from cryptocurrency investments. Investors seeking to invest had best enter with certain targets and clear exit points, so as to limit making decisions led by emotions like greed or fear.
Any cryptocurrency investment comes with some level of risk – whether you choose to trade on a decentralized or centralized cryptocurrency exchange. Be sure to put aside savings that you require for your basic needs and that a regular income is in place before investing.
When investing in a decentralized crypto exchange for the first time, be sure to test the waters and understand how to navigate by making small transactions at first.