EXCHANGES & TRADING

What is a Centralised Exchange?

A Centralised Exchange (CEX) is a crypto trading platform operated by a company or organisation that acts as an intermediary between buyers and sellers. It’s “centralised” because a single entity manages all operations, including user verification, order matching, liquidity provision, and custody of assets.

When you deposit funds into a CEX, you’re essentially trusting the platform to hold your crypto on your behalf. For comparison, it’s a very similar model to your traditional bank account. Your funds are stored in wallets controlled by the exchange, and you trade using account balances within their system rather than directly on the blockchain.

In practical terms, you don’t own the private keys to the assets stored on a CEX. Instead, the exchange provides you with access to an internal ledger that reflects your balance. This setup is similar to how traditional stock exchanges or online banking systems operate; convenient and user-friendly, but reliant on trust.

Common Examples:

Binance
Coinbase
Kraken
Bybit
OKX

Why Traders choose a Centralised Exchange

Centralised exchanges are favoured for their simplicity, liquidity, and speed. They’re often the first point of entry for new crypto investors because they support fiat deposits (bank transfers, credit cards, etc.) and offer familiar trading interfaces similar to those in traditional finance.

They also provide advanced services like margin trading, staking, futures, and API access for trading bots, all managed through a single account. However, because users must go through Know Your Customer (KYC) procedures and give up custody of their funds, this convenience comes at the cost of privacy and autonomy.

How to use a Centralised Exchange

These are the five steps for setting up and using your Centralised exchange account:

Create an account, complete KYC, connect email and 2FA.
Deposit fiat via bank/card or deposit crypto to the exchange address.
Place market or limit orders on the order book.
Exchange executes trade off-chain, updates your account balance.
Withdraw to a personal wallet if you want self custody.

It’s important to remember that if you choose to use a centralised exchange, you’re automatically choosing to use a hot wallet to hold your funds (unless you actively transfer in & out of the exchange into a warm or cold wallet). For a full breakdown of using a hot wallet, check out our “Which Cryptocurrency wallet is right for you?” lesson here.

Pro's and Con's of a Centralised Exchange

Here are the Pro’s & Con’s of using a Centralised Exchange:

Pro’s of CEX

Con’s of CEX

Liquidity and speed: Making large orders easier and slippage lower. Good for active trading.

Custody risk: The exchange holds private keys. If the exchange is hacked, insolvent, or fraudulent, user funds can be lost. (FTX is a headline example of CEX counterparty risk).

Fiat on/off ramps: Credit card and bank transfers are allowed in many jurisdictions.

KYC and privacy trade-offs: You trade under identity verification and possible surveillance.

User features: Margins, derivatives, advanced charts, staking, custodial services, and customer support.

Regulatory centralisation: Can lead to account freezes, withdrawals restrictions, or de-listings depending on local law.

Risks of a Centralised Exchange

Single Point of Failure
CEX centralises control within a single corporate entity that holds all user funds in custody. This creates a single point of failure: if the exchange is hacked, becomes insolvent, or suffers internal fraud, user assets are at risk. The collapse of FTX, Mt. Gox, and several smaller platforms illustrate how devastating this risk can be.

Operational Attacks
Because CEXs manage millions (sometimes billions) in customer assets, they are prime targets for hackers. Most exchanges use a mix of hot (online) and cold (offline) wallets, but breaches of internal systems, phishing of employees, or poor key management can still result in major financial losses.

Regulatory Interventions
Being centralised entities, CEXs can freeze accounts, restrict withdrawals, or block users based on government orders, sanctions, or regional compliance rules. This offers consumer protection to some extent but limits autonomy. Especially as an expanding asset class, the potential for account restrictions becoming linked to your account is greater.

Fees, Liquidity, Slippage, and Speed

CEXs generally charge maker/taker fees (around 0.1%–0.2%) and sometimes withdrawal or spread-based fees. These fees can range majorly across exchanges due to a number of factors. In some cases, exchanges factor in their fees by automatically modifying the live market price to show ‘after fees’ (less favourable feature across investors). Because trades are matched off-chain using order books, execution speed is instant and slippage is minimal, especially on large, liquid exchanges like Binance or Coinbase Pro.

This makes CEXs highly suitable for:

Institutional traders executing large orders (Consider OTC for $50,000+ transactions)
High-frequency trading and arbitrage (Day Traders)
Users seeking stable prices and low volatility between orders

Regulation and Compliance

CEXs are fully subject to jurisdictional laws. This means mandatory KYC/AML verification, data collection, and potential government oversight. While this can help prevent fraud and ensure some user protections, it also means trading anonymity is lost.

Most large CEXs (Coinbase, Binance, Kraken) hold licenses in multiple regions, maintain Proof-of-Reserves systems, and are increasingly transparent with their balance sheets. However users majorly rely on trust that the exchange is solvent and compliant. This highlights the importance of researching exchanges prior to investing funds into a live holdings account.

Safety Tips for Using a Centralised Exchange

Enable 2FA and use a unique password.
Whitelist withdrawal addresses when available.
Keep only the funds you actively trade with on the exchange. Consider adopting a cold wallet into your long-term portfolio holding strategy.
Research the exchange’s reputation, insurance policies, and Proof-of-Reserves prior to signing up & applying for KYC.
Treat your exchange account like a bank checking account, not a savings vault.
Use it for convenience, speed, and liquidity. Not long-term storage.
Always move assets to hardware wallets for long-term security.