Cryptocurrency Exchange

Why Trust Techopedia

What is Crypto Exchange?

A crypto exchange is a platform that allows users to trade cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and other digital assets. While the crypto exchange definition centers on trading, centralized crypto exchanges, such as Coinbase, also play an important role as a fiat onramp and offramp for cryptocurrencies.

Advertisements

For example, you can use traditional currencies like USD or GBP to buy BTC or other cryptos. Most exchanges also allow users to sell crypto assets for USD or other currencies, sending the proceeds back to their bank or funding account.

Techopedia Explains the Crypto Exchange Meaning

Techopedia Explains the Crypto Exchange Meaning

    The crypto exchange meaning refers to a trading platform that lets users trade cryptocurrencies or buy and sell cryptocurrencies using traditional currencies like USD.

    A centralized exchange (CEX) run by a company like Coinbase provides a convenient way for people to buy or sell cryptocurrencies using USD or other currencies. However, some exchanges focus on crypto-to-crypto trades. Another type of exchange, called a decentralized exchange (DEX), uses automated algorithms to facilitate crypto-to-crypto trades directly from a crypto wallet.

    How a Crypto Exchange Works

    Most centralized crypto exchanges support fiat currency deposits as well as crypto deposits, giving traders multiple ways to fund their trading accounts.

    How a Crypto Exchange Works
    Source: Coinbase Exchange

    Many also support simple trades, which allow easy purchases or sales with just a few clicks. However, behind the scenes, a more complex dynamic makes this possible.

    Coinbase Simple Trade
    Source: Coinbase Simple Trade

    A centralized crypto exchange uses an order book to facilitate trades. Traders can place limit orders, which are fixed-price orders to buy or sell a given cryptocurrency. These orders comprise the order book and provide liquidity for the exchange. Many of these fixed-price orders are placed by market makers, which are individuals or firms that acquire a trading inventory to help ensure adequate liquidity.

    Most exchanges also support market orders, which buy or sell against the existing limit orders, taking trading liquidity off the exchange. Many exchanges make limit and market orders available through an advanced trading platform that typically also includes customizable crypto charts and additional order settings, such as stop-loss orders.

    Crypto exchanges use trading pairs, much like forex currency trading. For example, the exchange may offer a USD/BTC pair, allowing traders to buy BTC with USD or sell BTC for USD. If you buy BTC using a centralized exchange, the exchange will hold your BTC in a custodial crypto wallet controlled by the exchange.

    However, you have the option to move your newly purchased crypto to a self-custody crypto wallet that you control. Some traders keep a small balance on their chosen exchange while safeguarding larger balances with a non-custodial wallet.

    Types of Crypto Exchanges

    While centralized crypto exchanges like Coinbase or Kraken are the most common way to onboard new crypto investors, there are two primary types of exchanges as well as a hybrid version.

    In addition, online brokers like eToro function much like an exchange from a user standpoint. Lastly, another type of exchange called a perpetual futures exchange allows derivatives trading, meaning speculation on future crypto prices using leverage. Perpetual exchanges are available both through centralized exchanges and as decentralized applications (dApps).

    CEX

    A centralized exchange allows users to buy, sell, or trade cryptocurrencies from inventory held on the exchange itself. Typically, centralized exchanges offer 100+ types of cryptocurrencies. Orders are executed using an order book system, as shown below.

    Coinbase Advanced Trade
    Source: Coinbase Advanced Trade

    DEX

    A decentralized exchange uses liquidity pools and automated market maker (AMM) algorithms to allow traders to swap cryptocurrencies, exchanging Crypto A for Crypto B. Decentralized exchanges use smart contracts, which allow trading without a centralized management team. Typically, a DEX offers a wider selection of cryptocurrencies, although limited to tokens supported by a specific blockchain. Trades execute directly from your crypto wallet without a need to transfer funds to the exchange beforehand.

    app.uniswap.org
    Source: app.uniswap.org
    • HEX: A hybrid exchange bridges elements of both a CEX and a DEX, providing centralized trading for most crypto assets while also supporting liquidity pools for specific assets.

    Deposit and withdraw traditional currenciesAsset storageManagementRegulationTransparencyCrypto selectionTrading cost

    CEX: Most CEXs allow purchases with debit cards or deposits through bank-funded transfers. Fiat withdrawals are supported.

    DEX: DEXs may offer third-party services to purchase crypto with fiat currencies. Swaps use crypto liquidity pool pairs.

    CEX: Trading funds must be held on the exchange but can be withdrawn when trades are completed.

    DEX: Users trade by connecting a crypto wallet to the exchange to authorize crypto-to-crypto swaps.

    CEX: A CEX has a centralized management team that creates and enforces trading rules.

    DEX: A DEX runs according to software rules and allows trading directly from a crypto wallet without using an intermediary.

    CEX: Many exchanges are registered or licensed with various regulatory agencies.

    DEX: DEXs are unregulated.

    CEX: CEX trades are not visible on the blockchain.

    DEX: All trades are visible using blockchain explorers.

    CEX: Centralized exchanges support cryptocurrencies like BTC that are not natively available on DEXs.

    DEX: Tokens are limited to those supported by the blockchain for the DEX. For example, a DEX may only support ERC-20 (Ethereum standard) tokens.

    CEX: Advanced trading fees can be well under 1%, although simple trades often cost as much as 5% or more.

    DEX: Trading costs typically range from 0.3% to 1, plus gas fees.

    Choosing a Crypto Exchange

    Choosing a Crypto Exchange

    Which crypto exchange you choose is largely a matter of preference. Some traders prefer an exchange with advanced features, such as OKX or Binance, while others favor a beginner-friendly exchange like Coinbase or Kraken. Other considerations include regulation, selection, fees, reputation, and support.

    Ease of use
    New or occasional traders may prefer an exchange that focuses on ease of use over advanced trading features.

    Advanced features
    Experienced traders may favor an exchange with margin trading, perpetual futures, or crypto options.

    Crypto selection
    The availability of certain cryptocurrencies on an exchange may affect your decision. Many traders use more than one exchange.
    Trading-related fees
    Trading fees and deposit or withdrawal fees affect trading costs.
    Spread fees
    Simple trades use spread fees, which, in this context, are a markup to lock in prices for simple buy or sell trades.
    Security
    Exchanges hold personal information as well as crypto on behalf of traders. Look for exchanges that detail their security measures and related certifications.
    Reputation
    Consumer review sites like Trustpilot may prove useful when evaluating the user experience of a given exchange. However, many well-known exchanges don’t score well.
    Customer support
    Some traders may value additional support options such as live phone support or live chat. However, most centralized exchanges offer an email ticket system at a minimum.
    Proof of reserves
    Some exchanges, such as Kraken, offer proof of reserves (PoR) using a Merkle tree to demonstrate that the exchange has the cryptocurrency you see on the account dashboard.

    Location-Based Availability

    Your location can also affect which exchanges you can use. For example, many popular crypto exchanges don’t support traders in specific jurisdictions. Often, restricted jurisdictions parallel US-sanctioned countries listed by OFAC.

    Following lawsuits from the US Securities and Exchange Commission (SEC) against exchanges like Binance, Kraken, and Coinbase, many crypto exchanges outside the US no longer support trading for US residents. Other jurisdictions around the world, such as Canada and the UK, may face similar restrictions.

    Crypto Exchange Safety

    Crypto exchanges that enforce Know Your Customer (KYC) requirements store personal identity verification on users, including a copy of a government-issued ID as well as a Social Security Number or equivalent. In addition, centralized exchanges also store crypto and fiat funds on behalf of users.

    Both personal data and crypto held on exchanges make tempting targets for hackers. To reduce risk to crypto assets held by the exchange, exchanges typically store most assets in cold storage, a method of storage that stores the private keys for exchange wallets offline.

    However, cold storage doesn’t protect against potential insolvency. In 2022, the FTX exchange collapsed, leaving many investors without a way to withdraw funds.

    As an option, you can move crypto you don’t need for immediate trades to a self-custody wallet that you control.

    Crypto Exchange Pros and Cons

    With the recent launch of crypto exchange-traded funds in many countries, investors have multiple ways to gain exposure to crypto markets. However, crypto exchanges bring more direct access to crypto markets, which comes with both pros and cons.

    Pros

    Cons

    • Centralized exchanges bring storage concerns
    • Initial purchase fees can be higher compared to buying a Bitcoin ETF
    • Many exchanges are unregulated and not transparent regarding financial strength

    The Bottom Line

    Centralized crypto exchanges offer a convenient way to buy cryptocurrencies using fiat currencies like the USD or GBP. In addition, users can trade one cryptocurrency for another using supported trading pairs.

    Decentralized exchanges are also growing in popularity, giving intermediate and advanced users more trading platforms and access to hard-to-find crypto tokens.

    FAQs

    What is a crypto exchange in simple terms?

    How does a crypto exchange work?

    What is an example of a crypto exchange?

    Which crypto exchange is best?

    Are crypto exchanges safe?

    Advertisements

    Related Terms

    Eric Huffman
    Editor
    Eric Huffman
    Editor

    Eric Huffman has a diverse background ranging from business management to insurance and personal finance. In recent years, Eric's interest in finance topics and in making personal finance accessible led to a focus on cryptocurrency topics. Eric specializes in crypto, blockchain, and finance guides that make these important topics easier to understand. Publications include Milk Road, Benzinga, CryptoNews.com, Motor Trend, CoverWallet, and others. Always learning, Eric holds several certifications related to crypto and finance, including certificates from the Blockchain Council, Duke University, and SUNY. When he's not writing, you might find Eric teaching karate or exploring the woods.