Where Crypto Trades: Centralised Exchanges

7.1 The front door

For most people, the first contact with crypto isn't a blockchain or a wallet. It's an app. Mint downloaded a crypto exchange app, signed up, and within a few minutes was looking at a screen full of prices that felt a lot like a stock trading app.

"Is this the blockchain?" Mint asked.

"No," said Hash. "This is a company. It sits between you and the blockchain, a bit like a bank sits between you and the money system. That's why it's called a centralised exchange."

7.2 What a centralised exchange does

A centralised exchange (CEX) is a company that lets you buy, sell, and hold crypto. It typically provides four things.

On-ramps and off-ramps. You can deposit local currency through a bank transfer or card and convert it to crypto, and later convert crypto back to local currency and withdraw it.

A marketplace. It matches buyers and sellers through an order book, which we'll explore in Chapter 11.

Custody. It holds your crypto for you, so you don't need to manage private keys.

Extra products. Many offer derivatives like futures, earning programmes, staking, and more.

For beginners, centralised exchanges are convenient. The interface is familiar, there's customer support, and if you forget your password, you can reset it.

7.3 What actually happens when you buy

Here's something many users never realise. When Mint buys 0.01 BTC on an exchange, usually no transaction happens on the Bitcoin blockchain at all.

The exchange keeps its own internal ledger. Mint's account balance goes up by 0.01 BTC and the seller's goes down. The actual bitcoin sits in the exchange's wallets, pooled together with everyone else's. Only when Mint withdraws to an outside wallet does the exchange send a real blockchain transaction.

So what Mint really owns on the exchange is a claim: the exchange's promise that it holds 0.01 BTC on Mint's behalf and will hand it over on request.

"That's just like a bank," said Node.

"Very similar," said Hash. "With one important difference. Bank deposits in many countries are protected by government insurance up to a limit. Crypto held on an exchange usually isn't."

Chapter 7 · What you actually own on an exchange

Inside the centralised exchange, a trade edits an internal ledger crediting Mint and debiting the seller, with no blockchain transaction. Everyone's coins are pooled in the exchange wallet. Only a withdrawal sends a real on-chain transaction to the blockchain.

7.4 Not your keys, not your coins

There's a famous saying in crypto: "Not your keys, not your coins." It means that if someone else controls the private keys, you're trusting them to give you your assets when you ask. Usually, that trust is fine. Sometimes, it isn't.

The most dramatic example happened in November 2022. FTX, at the time one of the largest crypto exchanges in the world, collapsed within days. It emerged that customer funds had been misused, and the exchange didn't have the assets to cover withdrawals. Millions of users were locked out of their money, and its founder was later convicted of fraud. Years earlier, in 2014, Mt. Gox, which once handled most of the world's bitcoin trading, collapsed after losing hundreds of thousands of bitcoin.

These aren't the only examples. Exchanges have also been hacked, frozen withdrawals during market stress, or been shut down by regulators. We'll study several of these in the Postmortems module.

None of this means you should never use an exchange. It means you should understand the trade-off you're making.

	Keeping crypto on an exchange	Self-custody in your own wallet
Convenience	High	Lower, you manage your own keys
Forgot password?	Reset it with support	If you lose your seed phrase, funds are usually lost
Exchange failure or hack	Your funds are at risk	Not affected
Ready to trade quickly	Yes	Needs a transfer first
Responsibility	Shared with the exchange	Entirely yours

A common approach is to keep only what you're actively trading on an exchange, and move longer-term holdings to self-custody once you've learned how to do it safely, which Module 2 covers.

7.5 Know your customer

To sign up on most regulated exchanges, Mint had to upload an ID document and a selfie. This process is called KYC (Know Your Customer). Along with AML (Anti-Money Laundering) checks, it's a legal requirement in most countries, designed to stop exchanges from being used for crime.

KYC also means the exchange knows exactly who you are. As we discussed in Chapter 3, once an exchange links your identity to a blockchain address, that address's history is no longer anonymous to the exchange or to authorities who request the information.

7.6 The fees you'll pay

Exchanges make money mainly through fees, and they come in several forms. Some are clearly listed. Others are hidden in the price.

Trading fees are charged on each trade, usually as a percentage. Many exchanges distinguish between makers, who place orders that wait in the order book and add liquidity, and takers, who place orders that fill immediately against existing ones. Takers usually pay a slightly higher fee.

Spread applies in "simple" buy and sell screens that show one price. The exchange may quote a price slightly above the market when you buy and slightly below when you sell, keeping the difference.

Deposit and withdrawal fees cover moving money in and out. Card deposits are often expensive. Crypto withdrawals include a network fee.

Here's how fees can add up. Suppose Mint buys $1,000 of ETH using a simple "buy" button with a card, then later withdraws it to a wallet.

Item	Cost
Card deposit fee (~2%)	$20
Spread on simple buy screen (~0.5%)	$5
Withdrawal network fee	~$1 to $5
Total	~$26 to $30

Now suppose Mint instead deposits by bank transfer and uses the exchange's advanced trading screen as a taker at 0.1%.

Item	Cost
Bank transfer deposit	Often free
Taker fee (0.1%)	$1
Withdrawal network fee	~$1 to $5
Total	~$2 to $6

Same purchase, very different cost. Actual fees vary by exchange, country, and payment method, so always check the fee schedule. The habit of reading it is more important than any specific number here.

7.7 Choosing an exchange

This series won't recommend specific exchanges. Instead, here are the questions worth asking about any exchange you consider.

1. Is it licensed or registered to operate in your country?
2. How long has it been operating, and what's its track record during market crashes?
3. Does it publish proof of reserves, showing it holds the assets it owes customers?
4. What are its fees for deposits, trading, and withdrawals?
5. Does it support your local currency and payment methods?
6. What security features does it offer, such as two-factor authentication and withdrawal address whitelists?

Proof of reserves deserves a note. After FTX, many exchanges began publishing cryptographic evidence of their holdings. It's a good step, but it typically shows assets, not liabilities. An exchange could hold plenty of crypto and still owe even more. Treat it as useful evidence, not a guarantee.

7.8 Try it yourself

Pick any two exchanges available in your country and find their published fee schedules. Compare three things: the fee to deposit with a card, the taker fee on the advanced trading screen, and the fee to withdraw BTC. Then check whether each one publishes proof of reserves and when it was last updated.

Key takeaways from this chapter

1. A centralised exchange is a company that provides on-ramps, a marketplace, custody, and other crypto products.
2. When you trade on an exchange, you usually own a claim on the exchange, not crypto on the blockchain, until you withdraw.
3. "Not your keys, not your coins": exchange failures like FTX and Mt. Gox show the risk of leaving assets with a third party.
4. Most exchanges require KYC, which links your identity to your activity.
5. Fees include trading fees, spreads, and deposit and withdrawal costs, and they vary greatly by method.
6. Evaluate exchanges on licensing, track record, proof of reserves, fees, and security features.