Cryptocurrencies have sent shock waves through the old economy not seen since the invention of the personal computer. Every day brings tales of fortunes made and lost, more businesses adapting to the virtual currency model and more stories about pending regulation and contradictory stories about a rosy, regulation free future. It's tough to know what to believe, but one thing is certain: at the moment crypto is the hottest commodity on earth. And in spite of some rough patches, it doesn't seem like it's going to cool down anytime soon. As such one of the most common questions swirling around the cryptocurrency revolution is this: How do I get some
There are two ways you can acquire Bitcoin or any of the nearly 1,400 copycat cryptocurrencies in circulation today. You can either mine them, or you can acquire them through an exchange. Mining is an incredibly involved process that requires you to:
The thing about mining is that it devours electricity like anteaters devour ants. You may even find that youre spending so much on electricity that its impossible for you to mine enough Bitcoin or other cryptocurrency to make your efforts profitable. On the plus side, you get to keep what you mine without having to pay any fees or join any exchanges.
Exchanges, on the other hand, are like a warm summer breeze compared to mining. Just set up a wallet, open an account and start buying and trading. The advantage of the exchange is its simplicity. The disadvantage is that you'll be charged fees and exchanges are vulnerable to hacks, which could wind up cleaning you out.
A decentralized exchange is the more complex to interact with but also more secure. With this type of exchange, the private and public keys never leave your computer until the transaction commences. There's no reason to have a third party act as an intermediary holding your crypto: all transactions are person to person. As such it's much less likely you'll lose money to a hack although transactions, as we said, tend to be more complex and take longer to process.
At the other end of the spectrum are centralized exchanges. Centralized exchanges are popular for a very simple reason: theyre easy to use and incorporate traditional fiat currencies into the equation. You can exchange your dollars or euro directly for Bitcoins or Litecoins or whatever and vice versa; you can exchange your Bitcoins for dollars or whatever currency you prefer. The problem most cryptocurrency users have with centralized exchanges are that they tend to be contrary to the anything goes, no fee principles behind the birth of cryptocurrencies.
Centralized exchanges are openly for-profit enterprises that charge transaction fees for among other things, providing access to the blockchain. Still, if people didn't appreciate how convenient they made transactions, they'd fold up pretty quick. But they don't because less orthodox crypto fans don't really give a tinker's cuss about egalitarianism. They want to turn a profit. And centralized exchanges provide them with more ways to do that than decentralized exchanges, which only allow crypto to crypto transactions. So until something better comes along the centralized exchange is likely to slog on, absorbing criticism while they count their money.
Theres one significant downside to centralized exchanges that calls out for more elaboration it is their troublesome habit of being hacked and losing everyone's money.For instance, in January 2018 a centralized exchange in Japan called Coincheck acknowledged it had been hacked and that approximately $500 million worth of a cryptocurrency called NEM was stolen from customers.
The company has said it is investigating and has suspended some services on the site.
In fairness though, its not just centralized exchanges that have been hacked. For instance, a Bitcoin exchange called Mt. Gox was hacked in 2014 with the cyberthieves making off with $450 million worth of the cryptocurrency ($7 billion using todays valuations). The Mt. Gox hack was a wakeup call for many decentralized exchanges and since then security has been significantly tightened with most hackers now going after centralized exchanges, personal wallets and even mining hardware via malicious downloads.
The centralized exchange will likely linger as a fixture of the crypto universe for some time, especially if they can get their security act together. By providing the ability to exchange crypto for fiat they provide a means of acquiring cryptocurrency decentralized exchanges simply can't. Not yet anyway.