7.4 Centralized Exchanges

Using centralized exchanges may be the easiest way to acquire and sell bitcoins but it also involves significant trade-offs. Centralized exchanges are companies that allow clients to buy and sell bitcoins directly through them. However, this convenience comes at a cost.

It’s important to note that when buying bitcoins through a centralized exchange, you are often required to provide personal information and verify your identity. This creates a risk of identity theft and exposes your personal information to potential threats. Additionally, centralized exchanges hold your bitcoins for you, which means you are not in control of your money until you withdraw it from them.

To add to these concerns, centralized exchanges can misappropriate users’ funds or lend more bitcoins than they have in reserves until they collapse. Yes, just like banks! However, in the Bitcoin world, there is no central bank to bail out fraudulent banks by printing more currency because you can't print more bitcoins!

On most P2P platforms, peers have to escrow some of the funds to ensure they will comply with their part of the deal. Escrow means putting the money in a safe place that the platform controls until both parties do what they promised. It's like a trusted friend holding onto your stuff until everyone keeps their word.