A centralised crypto exchange, otherwise known as a CEX, is a type of platform on which you can exchange cryptocurrencies. It allows you to exchange cryptocurrencies, or digital currencies, for other types of assets.
Centralised crypto exchanges can provide you with a plethora of different services depending on your needs. They’re managed and operated by companies that can centralise all the exchanges and provide you with the tech support you could possibly need. They coordinate cryptocurrency trading on a large scale and match buyers and sellers to each other to make the process as easy as possible.
CEXs have become an essential part of the global cryptocurrency exchange market and the development thereof. So, it’s really important to understand what a CEX is, how they work, and all the pros and cons of them.
We’ve given you a brief explanation, but let’s have a slightly closer look at exactly what a CEX is. A centralised cryptocurrency exchange is a platform on which you can trade your cryptocurrency. It basically acts as an intermediary or a middle man between buyers and sellers. That is, it matches buyers to sellers based on preferences. It does all this in accordance with a centralised order book.
Now, many people compare the way they work to old-school online brokers – that is, traditional online brokers. They’re very similar to online brokers that forex and equity traders already use.
CEXs are strictly regulated. Because they’re centralised, they must adhere to a number of security precautions too. They also provide users with exceptionally easy access to the crypto markets.
Additionally, centralised crypto exchanges tend to offer users a range of other crypto-powered financial services and products. As well as the ability to simply trade on the platform.
The real question, however, is how exactly do CEXs work?
Well, essentially, they provide an order book that processes buy and sell orders that any traders post. The exchanges made tend to aggregate these orders. And they match the buy and sell orders that correspond by using a matching engine.
When you’re starting out, however, you’ll probably need to complete the KYC background checks as a security precaution to confirm your identity. Now, some jurisdictions are more strict than others when it comes to this, so it all depends on these requirements and regulations.
Once you’re all verified, the first step you’ll need to take is to get some money into your account on the platform. Thus, you’ll have to deposit either crypto or fiat currency into your account. Some trading platforms actually allow you to link your credit card directly which can be a lot more convenient, depending on your situation.
Once you have funded your account, you can then choose the crypto, like Bitcoin, or token that you’d like. Then you place an order for it. Normally, you can choose from a selection of different types of order depending on what suits you. Your choices normally are:
Then you’ll receive your crypto and you’re ready to go!
The next step, once you’ve received your crypto, is to move it into a secure wallet. The difference between keeping your crypto in a wallet that’s independent of the exchange is that you’ll have complete control over it, removing any unnecessary risk. If you store it on the exchange itself, they are also able to access it. In the unlikely case of the company going bankrupt, it’s possible that they can use your crypto to get them out of debt. Of course, you definitely don’t want this to happen to you. Therefore, the best thing to do is to store it safely in an independent wallet.
The main difference between centralised and decentralised crypto exchanges is the entity that’s in charge. That is, in the case of the former, there’s a single entity that’s in charge of the exchange. But, in the case of the latter, there is no single entity that has complete control. Rather, apps and smart contracts automate transactions and trades.
Let’s have a look at the main components of crypto exchanges and we’ll highlight where centralised and decentralised exchanges differ.
When it comes to a CEX, the entire exchange is far more liquid than a DEX. This is because it has a larger user base due to the presence of institutional investors. It also operates in a structured and regulated environment which tends to attract more users.
When it comes to the liquidity of DEXs, they tend to be far less liquid on average. There are a few that are more liquid than others, but generally speaking, they’re less liquid because they don’t offer as much security since they’re not as regulated and structured as CEXs.
The term “custody of assets” refers to the control you have over the crypto that you purchase. If you’re using a CEX, you need to transfer your assets from your independent wallet back onto the platform. Once you do this, however, the CEX takes custody of your assets. So, once you’re done, you’ll need to transfer it back to your independent wallet again.
When it comes to DEXs, however, you always have complete control over your assets. You only have to connect your wallet when you’re ready to start trading on the decentralised exchange.
A centralised organisation has complete control over a CEX. However, a DEX, on the other hand, isn’t controlled by a centralised organisation at all. Smart contracts control it, meaning that no single entity has complete control.
When it comes to accessibility, DEXs are the easiest because they’re accessible to all. Thus, absolutely anybody can get involved in a DEX because they don’t require verification of identification.
CEXs, however, are different. It all depends on the central authority that’s in charge, because some require users to verify their identification and others don’t. Those that do, however, are far less accessible and tend to exclude certain people who cannot or will not verify their identity, for whatever reason. The policies and rules set out by the CEX and the central authority in question will stipulate these requirements upfront.
By their very definition, DEXs are not regulated. Some CEXs, on the other hand, are regulated. It’s likely that in the future, more CEXs will be regulated.
Now that we’re clear on exactly what a CEX is and how it’s different from a DEX, let’s analyse its pros and cons.
We’ve noted it a few times but we’re going to highlight it again just in case it wasn’t clear before. The biggest risk of getting involved with a CEX is that your assets are stored on the platform. This means that you don’t have control over them. Thus, if something happens to the platform, your assets are at risk and there’s nothing you can do about it.
Unfortunately, there have been cases in the past where large, previously successful, CEXs have been the targets of big hacks. This happened to Mt. Gox in 2014 and Bitfinex in 2016. Both cases ended up with users assets stored on the exchange getting lost. Thus, the greatest hit was felt by consumers themselves. Many lost huge sums of money. There was also no recourse they could take either, so the money was essentially donated to the hackers who walked away smiling. And incredibly rich thanks to hefty crypto investments.
Of course, since then, CEXs have made sure that they’re far more protected and have far greater security systems in place. Many implemented policies that allow customers to claim refunds in the event of a hack, decreasing the risk of loss dramatically.
However, as we noted, hacking isn’t the only reason customers assets are put at risk when they’re stored on the platform. That is, if the company happens to go bankrupt, the exchange is legally allowed to use the stored funds to pay what they owe, leaving the customers as the ones who have lost out.
Luckily, there’s a way to get around this problem, and that is to simply transfer your assets from the CEX to an independent wallet when you aren’t trading. If you do this, your assets will be safe and secure, and when you want to trade again, you can transfer your assets back and continue trading. Of course, the time that your assets do spend on the platform is still a risk, but it’s far less than if you were to leave everything there permanently.
Here are some answers to some other frequently asked questions, in case you still have any thoughts after reading our guide.
If you use them properly, then yes, they can be safe. One thing that makes them safe is that they’re well regulated and users are normally required to verify their identities using the KYC process.
As we’ve said above, the biggest risk you have is leaving your assets on the exchange permanently. So if you want to be completely safe, rather transfer your assets to an independent wallet.
This can depend on several things – that is, the day of the week, the CEX in question, the country you’re doing it from and more. However, generally speaking, it takes between one and 24 hours to transfer assets from a CEX to another type of wallet.
A few commonly used CEXs include Huobi, Coinbase, Bitstamp and Binance. However, there are loads more available!