Centralized exchange in crypto trading: what it is and how to use it

What is a CEX in the modern digital asset world? It is an online platform for trading cryptocurrencies operated by a single company or organization. Over the years, the crypto industry has transformed into one of the most dynamic and attractive financial segments, but trading digital assets requires a deep understanding of tools and risks.

How a centralized exchange works

A centralized crypto exchange is a CEX — a platform with a clear management hierarchy. It has a central governing body that ensures the operation of the entire system. Historically, the first exchanges operated quite anonymously, but over time, as the number of users grew exponentially, regulators began requiring the implementation of identification procedures. Today, all participants must undergo identity verification before trading.

The process of working with a centralized exchange begins with registration. You create an account, verify your identity through documents, and fund your account with fiat or cryptocurrency. After that, full functionality of the trading platform becomes available.

Functionality and tools of CEX

Centralized exchanges offer a wide range of trading tools for professionals and beginners:

• Market orders — instant execution at the current price
• Limit orders — waiting for the desired price to be reached
• Stop-loss and stop-limit orders — risk management
• Margin trading — using borrowed funds
• Leverage trading — increasing potential profits

All orders are sent to a single order book, where the system automatically matches buyers and sellers. When demand meets supply of the required volume, a deal is executed.

Security of asset storage

Most centralized platforms use an asset separation strategy:

• Cold storage (80-90% of funds) — completely offline and protected from hacking
• Hot wallets (10-20% of funds) — connected for liquidity and quick order execution

This separation significantly reduces the risk of losses. However, experts recommend withdrawing assets to personal wallets after trading sessions, especially if large sums are involved.

Fees and commissions

Platforms generate revenue through transaction fees. Usually, two types of fees are charged:

• Maker fee — for placing an order in the order book
• Taker fee — for executing an existing order

Although each fee seems small (usually 0.1-0.5%), active trading can make the total amount substantial. Many platforms offer discounts to large traders or token holders.

Main advantages of the centralized format

CEX remains the dominant trading format due to several factors:

Ease of use — interfaces are designed so that even beginners without technical knowledge can master them. All functions are intuitive and logically organized.

Support and guarantees — exchanges provide 24/7 technical support, educational materials, and compensation guarantees in case of hacking. This is critical for users concerned about the security of their funds.

Variety of services — in one place, you can access not only trading but also staking, NFT marketplaces, P2P exchanges, and launchpads for new projects. This simplifies portfolio management.

High liquidity — trading volumes allow quick entry and exit from positions even with large sums without significant slippage.

Disadvantages of the centralized model

Despite its popularity, centralized exchanges have significant limitations:

Risk of hacking attacks — even with serious investments in security, attackers find vulnerabilities, often through social engineering. Loss of funds is possible, although most major platforms insure against such scenarios.

Custodial storage — the exchange owns your private keys, meaning it can freeze or confiscate assets at any time. As the well-known saying in the crypto community goes: “not your keys, not your coins.”

Dependence on regulation — changes in laws can lead to restrictions or even shutdowns. Some countries have already banned such exchanges.

Transaction fees — constant payments for each transaction accumulate and affect overall profitability.

Alternative: decentralized exchanges

As the crypto community grows, many have criticized centralization as contrary to the very ideology of blockchain. This has led to the creation of decentralized exchanges (DEX).

What is a DEX? It is an automated platform operating on smart contracts without a single central authority. Instead of a centralized order book, they use automated market makers (AMM) — algorithms that determine prices based on token ratios in liquidity pools.

The main advantage of DEXs is full control over your assets. You connect your personal wallet, and tokens are transferred directly to you. No need to register, verify, or trust third parties with your funds.

However, DEXs have disadvantages: lower liquidity leading to slippage, lack of fiat purchase interfaces, and higher entry barriers for beginners.

CEX or DEX: which to choose

The answer depends on your goals and experience:

• Beginners and active traders will benefit from centralized exchanges due to convenience, support, and a variety of tools
• Experienced users prioritizing privacy and independence will prefer decentralized platforms
• Conservative investors are advised to use both types: trade on CEX but store main assets in cold wallets

Key takeaways

A centralized exchange is an essential tool in the modern crypto ecosystem, simplifying market entry and providing necessary functionality. But remember: security requires personal responsibility. After trading, withdraw funds to your personal wallet or, ideally, to a hardware storage.

The future of crypto trading will likely involve hybridization — CEXs will become more user-friendly, DEXs will develop their functionality, and both formats will coexist peacefully, offering choices based on each user’s needs.