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The short version

  • A centralized cryptocurrency exchange (CEX) is a service for buying and selling digital currencies like Bitcoin and Ethereum.
  • Centralized exchanges are the easiest way to buy cryptocurrency, but there are some long-term security risks of letting someone else control your cryptocurrency.
  • In a centralized exchange, users trade shares with other users of the same exchange rather than trading in an open market.

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What is a centralized exchange?

A centralized exchange works kind of like a stock market for cryptocurrencies.

Each exchange provider offers a platform where users can instantly buy and sell digital coins and tokens for a modest fee. For most people, a centralized exchange like Coinbase, Gemini, or Binance, is the easiest way to get started with cryptocurrency ownership and investing.

These centralized exchanges work differently from decentralized exchanges (DEXs), like Bisq, PancakeSwap, and SushiSwap. With a DEX, users worldwide can connect their Web3 digital wallet to the exchange platform to make a currency swap at current market rates. Decentralized exchanges also charge a fee, plus additional network charges (e.g., Ethereum gas fees) to move the currencies to and from your wallet.

Related: Centralized vs. Decentralized Exchange: which is right for you?

One of the most significant differences between centralized and decentralized exchanges is how your currency is stored. With a centralized exchange, the exchange acts as a custodian and holds your cryptocurrencies for you. With a decentralized exchange, you control your wallet keys and security.

There are some benefits to using a DEX— greater security from hacks and fraud, being a big one — but also some risks. But getting up and running with a decentralized exchange requires more computer skills and an understanding of how crypto works. They're best for intermediate to experienced cryptocurrency users.

Luckily, nearly anyone comfortable with computers or has experience with online stock brokerage firms or apps should be able to figure out how to use a centralized exchange fairly quickly.

How CEXs work

Wth a funded account on a centralized exchange, you can buy and sell crypto, similar to buying and selling stock on a stock exchange. In order to start trading on a centralized exchange, you’ll have to sign up for an account and add funds in your national fiat currency, such as the United States dollar or euro.

Just getting started?:How to trade cryptocurrency (in 6 easy steps)

It’s important to understand that trades happen only with other users of the same centralized exchange. For example, when you buy cryptocurrency using Coinbase, you can only buy from other Coinbase users. The same goes for all centralized exchanges, leading to pricing differences across different platforms.

There is no perfect cryptocurrency exchange for everyone, but with so many new options cropping up, there is likely a suitable one for your goals.

Helpful features to look for include:

  • Live market prices for all supported currencies
  • High liquidity and efficient markets
  • Low costs and fees
  • Active trading platform
  • Supported currencies
  • Security history and reputation
  • User friendliness

By understanding what you’re trying to achieve with cryptocurrency investing and trading, you can find an exchange with the combination of features you care about most.

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Popular centralized exchanges

Major cryptocurrencies are global, decentralized assets with no single owner or controller. That means anyone with the proper knowledge and tools can create a cryptocurrency exchange. However, due to scams and previous losses, it’s typically best to stick with the most reputable exchanges. Some of the top ones include:

Coinbase: One of the most recognized cryptocurrency exchanges in the United States, Coinbase is a large, publicly-traded company with its own stock available. The platform is ideal for beginners and newer crypto traders, though fees can add up quickly. Read our review of Coinbase here.

Gemini: Gemini is a large cryptocurrency exchange run by the Winklevoss Twins, (best known for their past legal drama with Facebook founder and CEO Mark Zuckerberg). Gemini is an established exchange with a respected stablecoin and an excellent program for earning rewards. However, trading fees are high. Read our review of Gemini here.

Kraken: Kraken is noteworthy for low fees, a solid earning program, and support for a long list of currencies. The tools are geared more toward intermediate to advanced cryptocurrency trades. Read our review of Kraken here.

Binance.US: A subsidiary of Binance, the largest global crypto exchange, Binance.US is a US-only version of the exchange operating in compliance with United States securities and trade laws. Read our review of Binance.US here.

Further reading>>Our comparison of Binance vs. Coinbase

Are centralized exchanges safe or risky?

So are centralized exchanges safe? The answer is somewhat complex and depends on the exchange you choose.

In general, large, reputable exchanges like those listed above are a safe place to store your cryptocurrency — as long as you follow strict online security practices, like using unique passwords for every website. Employing two-factor authentication, which is offered at any respectable exchange, is another critical step in securing your account.

Choosing a secure and reputable exchange is also important. In the past, some less-reputable exchanges fell victim to large-scale hacks where cybercriminals stole a significant portion of the company’s cryptocurrency. Mt. Gox is one of the most infamous examples.

You're unlikely to get your crypto back if you have crypto in an exchange and someone robs the exchange. There’s no FDIC for digital currencies.

There’s also a systemic risk that the price could drop with all cryptocurrencies. This is a cryptocurrency investment risk no matter where you hold your assets.

Protect yourself:How to spot a crypto scam

How does a crypto newbie start trading on a CEX?

Want to dip your toes into crypto? Follow these steps to get started with a centralized exchange:

  1. Pick an exchange: Start by reviewing your top exchanges focusing on fees, available currencies, and other features.
  2. Create and verify your account: Create an account using your email address and a unique, secure password. To fully access the platform, you may have to go through the Know Your Customer (KYC) verification steps, such as uploading a picture of your photo ID and verifying personal information.
  3. Add funds: Connect your bank account and transfer funds to your centralized exchange account. Some exchanges let you trade instantly while your transfer is still in process, but you can’t withdraw funds until your deposit clears.
  4. Buy your first crypto: Load up the trading tool and set up your transaction. Double-check the details before clicking the buy button — crypto transactions are not reversible, and the exchange isn’t likely to undo a mistake.

Pros and Cons of centralized exchanges

Pros

  • Quickly and easily buy and sell cryptocurrency
  • Generally safe if you follow online best practices for digital security
  • Stake cryptocurrency to earn rewards where eligible

Cons

  • High prices and fees
  • Risk of cryptocurrency exchange hacks
  • Risk of account hacks

The bottom line

For most people, a centralized exchange is a gateway to cryptocurrency. It's often the best and easiest place to get started with crypto investments. And after users are familiar with the exchange of their choice, they can decide for themselves if they want to transfer their funds to external hardware, software, or Web3 connected wallets.

However, as easy and as fun as it might seem, it’s important to remember that cryptocurrency is risky. It’s wise to take those risks into account and avoid investing more than you can afford to lose. But if you trade within your limits and maintain watertight online security measures, you should have a positive cryptocurrency exchange experience.

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Eric Rosenberg Freelance Contributor

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time.

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