Why Centralized Exchanges (And Casinos) Want You To Trade

When gambling, players bet against casinos (that are always sure to win). 

Crypto trading enthusiasts state that their methods to make easy profits are much fairer towards end-users. When trading on a centralized exchange, you bet against other people with similar accounts, just like yours. Therefore, your chances of gaining seem to be much higher.

Yet, the sad statistics claim that 80% of day traders lose more than 90% of their initial deposit during the first two years and eventually quit the game.

These two resorts of vice share a common feature. With their seeming simplicity, they encourage you to bet or trade more because this kind of behavior is the key source of their profits. Read on to find out how they make their money and what you can do not to fall for their honey traps.

How Do Casinos Make Money

The games that casinos offer are aplenty. Yet, regardless of the game type, the casinos always bear some built-in advantages that help them stay afloat. Here are some examples of how they work:

• Roulette. In this game, there is an equal number of red and black cells, so the chances of winning seem to be 50/50. Yet, there are also two additional slots, 0 and 00, which increase the casino’s chances.
• Poker. While gamers usually play against each other, casinos act as middlemen providing them with a dealer and a secure gaming environment. For these services, casinos charge their fees.
• Slot machines. Despite their simplicity, these machines are the trickiest as the chances of winning are the lowest. With slot machines, all you need to do is drop a coin, pull a handle, and grab a much larger payout in case the screen shows coinciding images. The worst thing about this game is that even the smallest gain immensely increases your endorphins making you spend more and more until you eventually lose everything.

Besides the classic set of games, casinos also make money on additional services which make it even harder for gamblers to abandon the establishment. 

Luxurious restaurants, bars, hotels, jewelry shops - all of these sell their goods and services at a cost much higher than the average which contributes to the casinos’ profits.

How Do Centralized Exchanges Make Money

If you take a look at an average centralized cryptocurrency exchange, you will see that the methods it uses to make profits are pretty similar to casinos.

First, while acting as middlemen and helping buyers and sellers connect, CEXs charge maker and taker fees on every transaction. Thus, regardless of whether your order was profitable or not, the exchange will get its income.

Next, thanks to their opaque nature, CEXs can manipulate the prices in their favor. For example, with the large resources that they have at hand, they can perform the pump and dump schemes on specific coins. 

Sometimes these schemes come out into the light making these exchanges face relevant charges, but it doesn’t make any difference.

Knowing these facts alone could bring people back to their senses. Yet, even the slightest chance of making easy profits makes traders dependent on these activities. Thus, they spend more time and money until their deposit runs out.

Does that ring a bell?

Finally, many traders make their decisions with limited information at hand. They buy and sell at the wrong times and often act impulsively which makes trading resemble gambling even more.

How Margin/Leverage Multiplies the House’s Advantage Against You

Just like with the casinos, the whole CEX’s business model is built around traders losing money. Yet, margin trading outshines all other existing tools and features.

How Does Margin Trading Work?

Often referred to as leveraged trading, margin trading enables users to borrow funds to bet on the price of an asset to grow or decrease.

Here’s an example of how it works with some tangible numbers.

Say, you feel bullish about Bitcoin and expect its price to grow by 10% in the upcoming week. You can buy BTC and hold it for future profits, but the problem is that you only have $100 at hand. 

To boost your profits, you borrow $1,000 using your $100 and bet that sum you have on Bitcoin’s price rising. 

If your bet is successful, you double your current holdings, i.e. you get $200 in return. Alternatively, you lose your whole deposit.

Why Do You Lose Money with Margin Trading?

The model described above may seem quite attractive. It enables traders to get broader exposure to the cryptocurrencies they want to trade and boost their gains while risking just a tiny sum of money.

Yet, large gains and the simplicity of obtaining them are nothing but bait. The chances of winning this game are as high as those you have in a casino, and here’s why:

• The lack of a full picture. Even the most experienced traders cannot control the whole situation. With margin trading, they bet against the market. Yet, they do not see the full picture of what’s happening, and therefore, they often make mistakes that result in money losses.
• The lack of transparency. As mentioned earlier, centralized exchanges have opaque infrastructure which enables them to manipulate the prices of the assets in their favor.
• Emotions. When trading crypto, it’s hard not to hold back your emotions. Even the smallest gains can bring your spirits to the highest and eventually make you bet again and again.

With that said, it may seem that your chances to make money while trading crypto are as high as with winning a jackpot (i.e.something from the realm of fiction).

Yet, don’t despair. If you are still inclined to try this method of making profits, there are a few things you may do to secure your positions.

How To Not Get Victimized By CEXs

Here are some pieces of advice for those who prefer active trading above all other means of making money in crypto.

1. Don’t get involved in margin trading

Trading with leverage on a CEX is almost a guaranteed way to lose your money. If you see a potentially profitable trend or signal, the trading specialists who operate the CEX are sure to see this trend, too.

With the full control that the CEX has over its assets, changing the numbers for its own benefit is as easy for it as 1-2-3.

2. Control your emotions while trading

When you get involved in high-risk activities, it is pretty easy to get carried away and lose control over the situation because of emotions.

To avoid this, develop your trading strategy and strictly follow your own rules when analyzing the market and making orders. Keep your emotions under control and do not let them influence your decisions.

3. Only use CEXs as off and on ramps

Despite their numerous drawbacks, CEXs remain one of the major ways for traders to buy crypto for fiat and vice versa. 

If you lack access to decentralized solutions, you can still rely on this method. Yet, be sure to withdraw your funds to a non-custodial wallet as soon as the operation is complete.

Bottom Line

Just like casinos, centralized exchanges want their users to trade as this is their key source of income. However, it’s nearly impossible to win when you bet against a market that resembles the Wild West more than any TradFi establishment.

Yet, CEXs are still the major players dominating the market. While it’s difficult to avoid interfering with them, there are ways to bring the associated risks down to the minimum.