A centralized cryptocurrency exchange is a trading platform that allows its users to trade cryptocurrencies for other cryptocurrencies and various types of assets.
The word “centralized” means that the exchange is operated by a centralized authority, and that users’ assets are kept by the exchange in a centralized location, which can mean that they are more susceptible to theft.
Binance, Poloniex, Bittrex, and BitStamp are a few examples of centralized cryptocurrency exchanges.
Similar to a traditional financial exchange, like a stock exchange, a cryptocurrency exchange’s main purpose is to facilitate the buying and selling of digital assets, and to collect fees in exchange for its facilitation.
Most cryptocurrency exchanges allow traders to make limit orders and market orders, and the broker process works as it would with more traditional assets.
Because cryptocurrencies are much more volatile and (arguably) subject to market manipulation, theft, and fraud than more traditional types of assets, many centralized cryptocurrency exchanges have certain additional protections built into them.
When choosing a cryptocurrency exchange, it is important to know how the exchange is working to keep its users’ assets safe from these kinds of threats, and how successful the exchange has been in avoiding hacks and other problems in the past.
Decentralized vs Centralized Crypto Exchanges
Centralized exchanges facilitate trades bilaterally from fiat-to-cryptocurrency. Moreover, these exchanges can also enable trading between two different cryptos.
By extension, decentralized exchanges function as an alternative in that they operate without a middle man and work as a Peer-to-Peer (P2P) exchange.
The primary point of difference between centralized and decentralized exchanges is the prevalence of a middle man.
Decentralized exchanges lower in frequency and less popular relative to centralized exchanges.
However, decentralized exchanges are a growing force in crypto and are only increasing in number over the past few years.