About 99 percent of all cryptocurrency trading volume flows through centralized exchanges because they obviously tend to solve the main pressing problems for cryptocurrency traders today, namely liquidity, asset security and of course, and many more.
Liquidity, for instance, is such a pressing problem for those trading large orders and are best executed on these exchanges. Although many DEX and smaller exchanges offer successful trading at lower fees, executing large orders without affecting prices is usually problematic to achieve if not impossible due to lack of liquidity.
Apart from offering trades and hosting trading activity, the ability of a single exchange to keep reserves to draw from when trading volume plummets, will determine the success of that exchange when market activity is very high. Otherwise, many traders will want to leave after several days of frustrations of having their orders not filled. For instance, since many traders will buy a coin, hold and wait for it to reach a certain price, populated buy or sell orders at that targeted price might cause liquidity problems with other added challenges such as increased transaction fees and delays.New coins that list on smaller exchanges will suffer immensely from low liquidity.
At the end of the day, traders dealing with large orders might finally decide to settle on using centralized exchanges to deal with this problem. Fees for trading will vary from one exchange to another and having mentioned the convenience of centralized exchanges, the fees on them might be a little bit higher between 0.25% to 3% compared to DEX -- many of DEXs require no fee or charge a small fixed fee.
Most exchanges today enter into partnerships with third party companies and individuals to go around the liquidity problem.
Apart from the liquidity, security and high fees issues, here are some more challenges you could encounter in trading cryptocurrencies and how to overcome them
1. Price manipulation
Price manipulation is the largest cause of volatility in cryptocurrency markets and although it is not necessarily a problem for experienced traders, new ones always seem to be on the wrong end of manipulation. Unable to read the signs of buy walls and sell walls given their lack of experience and knowledge, they become unable to identify favorable prices that will work for their trades.
For instance, false buy walls might spark a false buy signal fueled by buyer ignorance and flawed logic. Buying at this time would eventually lead to more pressure on small-time investors and they are unable to enter the market at a specific price range.
It is obvious that the way to solve this problem for a cryptocurrency trader is understanding the markets, market orders, and how they work. For instance, identifying false buy walls and sell walls is not as hard as one would think.
2. Falling too easily for some brokerages
Many Forex companies are now listing cryptocurrency trading as an option. Thousands of cryptocurrency investors consider using these platforms as a good cryptocurrency trading option because they come with a get rich quick mentality. However, most of these investors choosing the platforms end up losing most of the money because brokerages are likely not encouraging an open market but most just want to prey on investors who are using them as counter party.
Most people willing to trade cryptocurrencies also tend to trust these platforms because they believe that they are regulated. However, most of claims on regulation turn out to be simply disclaimers. To deal with this problem, it is always advisable to not use a platform that you cannot withdraw your digital assets from.
3. Fake news/shilling
Fake news is a severe problem in cryptocurrency trading and investment. The intention for fake news is usually to influence prices and public opinion; the activity is known as shilling. And since most of the stories distributed through social media channels are picked from websites and other sites without any fact-checking, they can sway trader and investor opinions about the type of coin in question. This makes them start decisions and activity based on those news.
Anyone can fall prey to fake news and there is the difficulty of determining which cryptocurrency news is sham and which one is genuine, but the problem is worse when the audience is not informed about cryptocurrencies and markets. For instance, news is not the only factor to use for judging legitimacy of an investment or trading action.
News may and do spark price changes, but those changes are almost always unsustainable if the trend they spark is not eventually backed up by other things such as sustained community interest or let's just say when an announcement or news sparks a short-lived community interest in a given crypto. Again, it is purely possible for a cryptocurrency trader to benefit from fake announcements and news that come with short price busts, for instance with a short term trading goal.
Plus there are genuine announcements for upcoming products that come with short price busts for cryptocurrencies. That means the focus for you would become how to correctly determine the timing for when to sell or buy if there are news likely to cause a price change in the short time and you are having short term goal on the same.
But, while news might have plainly, the strategy will not be sustainable for a long term investment goal.
The best way to approach such an issue or problem in cryptocurrency trading is to ensure you, as a trader, are able to use as many factors in judging price trends in addition to using news and announcements (mostly for those with long term investment goals). Also, take time to do your own research when investing or trading.
4. Scams and ponzi schemes
Guarantees for a set amount of profit at a specific time are not unusual in cryptocurrency investments. The fact that a project promises profits doesn't necessarily mean it is a scam: many investors even on genuine platforms want to know how much they can get from their investments.
However, investments with promises for exorbitant profits from mining and ICOs should stir some suspicion in cryptocurrency investments. Nevertheless, whether a project gives promises for huge or small guaranteed profits, it is necessary for any trader and investor to check further into the project and its details. A common advise is to also invest money you are willing to lose on any project.
Again, most people willing to trade or invest in cryptocurrencies also start small: you can increase the amount later after gaining more experience and information about how it works.
5. Transaction delays
Most cryptocurrency platforms are very slow to use, from the time you register an account to deposit and making a sale. For instance, most platforms have longer confirmation times during which a mine should take place for a transaction to go through. The problem is also worst for networks that have many users and people and in the event of high trading activity. This has also an effect of increasing transaction costs.
In most cases, instant purchases and withdrawals of cryptocurrencies are possible with credit and debit cards although that comes at a higher fee. However, there are some platforms in which you can transact immediately, whether you are depositing fiat in order to buy cryptocurrencies or selling crypto to get cash. You can also consider an investment strategy where you put reserves into a crypto exchange to trade when time is right.
You can also use GDAX and Gemini for instant fiat deposit for free (up to $500 daily and $15,000 daily). Besides, peer-to-peer exchanges such as localbitcoins.com have almost near instant purchases for almost every cryptocurrency if you get a matching order quickly. These are good options because you can always buy and send cryptocurrencies (after buying) to any platform as well including the popular exchanges.
6. Lack of price uniformity
Again, this is not necessarily a problem for most traders because they can always buy crypto from one platform and sell it to another at a higher fees. However, price uniformity across different platforms even for one given cryptocurrency and at different time periods beings the problem of needing to do investment analysis, for instance based on price charts. The analysis is important for those wanting to see exchanges they can use to trade at low fees for higher profits.
Additionally, the unpredictability of these price non-uniformity might require a trader to do changes on their trading strategy from time to time. This means you will need to put more effort and time into watching markets.
One killer tool to use in dealing with price differences across exchanges is using real time price tracking tools that enable you to compare prices of a given asset across exchanges, and then you can take real time trading decision based on that information. Many also do automate trades by way of using limit orders.