How to Choose a Centralized Cryptocurrency Exchange (CEX)

How to Choose a Crypto Exchange?

When choosing a crypto exchange, you can review the assets supported on the exchange, the regions it is available in, the exchange's trading volume and fees, as well as its security and proof of reserves. Other considerations may include advanced trading features like perpetuals or derivatives, or additional financial services like staking or P2P trading.

Key Takeaways

• Centralized exchanges are the custodians of customers’ assets and offer an integrated interface to handle trading of supported assets. In order to use a centralized exchange, users must pass KYC checks. 

• Centralized exchanges offer fiat on-and-off ramp services, making it easy for users to buy and sell cryptocurrencies with fiat money.

• Some considerations when deciding on which centralized exchange to use include: supported assets, regions supported, proof of reserves, and trading volume.

Cryptocurrency exchanges are an online version of a marketplace, and can be either centralized or decentralized. A centralized crypto exchange resembles a bank, where the institution is the custodian of all digital assets deposited on the exchange and matches buyers and sellers on its platform, while a decentralized exchange cuts out the intermediary, using on-chain smart contracts to run its exchange services.

Based on data from CoinGecko, centralized exchanges are dominating the market and are currently the go-to platform for cryptocurrency trading, where the top 10 exchanges by 24h volume are all centralized. 

Binance has over $14.5 billion in 24h volume, while Uniswap, the biggest decentralized exchange, only has around $1.2 billion in 24h volume.

In this article, we look at centralized cryptocurrency exchanges, their features, and how to choose the most suitable centralized exchange for your investment and trading activities.

An Introduction to Centralized Crypto Exchanges

A centralized exchange acts as an intermediary to conduct transactions, where both buyers and sellers trust this entity to handle the transactions and their assets. It’s similar to a bank, where customers trust a bank to look after their money for them. Centralized exchanges are also regulated, with users needing to pass KYC (Know-Your-Customer) and AML (Anti-Money Laundering) checks to verify their identity before they can register and use the exchange.

Centralized exchanges offer an easy way for new users to trade cryptocurrencies by removing worries such as sending funds to the wrong address, or losing their private keys (and subsequently access to the wallet and all its funds). After all, as the centralized exchange holds custody of all funds, users can reach out to customer service to restore their account if they forget their password. 

Ultimately, the success of a centralized exchange largely depends on its trading volume and liquidity, as the higher the level of trading volume, the lower the risk of volatility and slippage, where the price of a token changes during the execution of a trade request.  

Features of a Centralized Exchange

Now, let’s look at some of the key features of a centralized exchange and how these work.

Order Book

The order book is an integral part of a centralized exchange’s design. Centralized exchanges operate an order book to allow customers to place a trade. An order book is a record of buy and sell requests (for an asset pair) by traders. It usually features a sell-side and buy-side with prices quoted relative to the base currency. In a usual order book system, the orders are arranged according to the price ranges, where orders at specific prices are calculated and presented in the book. Sell orders are arranged in ascending order (lowest asking price first) while buy orders are arranged in descending order (highest bid first).

Source: Order Book – BTC/USDT (Binance)

The order book is proof of the liquidity level for an exchange or an asset, where the exchange executes traders’ buy and sell requests based on the order book. For instance, a Buy order that corresponds to the presiding asking price is executed immediately; otherwise, it is added to the order book to be executed when the requests are fully met. In a case where assets available at the presiding price range are not enough to complete the request, the remainder is also added to the order book. Order books are real-time, and balances change at a rate equal to the trading activities.

On decentralized exchanges, trading is facilitated by liquidity pools.

Fiat On-Ramp/Off-Ramp

Centralized exchanges make it easy for users to buy crypto with fiat money through fiat on-ramp services. These services enable investors to purchase cryptocurrencies using funds in their traditional banks, and usually involve a third-party financial service provider that executes the purchase request on behalf of the exchange and the customer. 

The third-party financial service provider partners with banks or electronic payment services to access the fiat money in the customer's bank, although credit cards usually come with an additional fee. Fiat on-ramp simplifies an investor’s entry into the crypto space, cutting the hassles of purchasing their first crypto asset through other complicated procedures. Likewise, most centralized exchanges also support direct fiat withdrawals to customers’ bank accounts.

Fiat/Cryptocurrency Pairs

Customers exchanges that support fiat/cryptocurrency trading pairs are able to trade cryptocurrencies with a fiat currency as the base or quote currency. The exchange creates a channel for customers to deposit fiat money into their exchange accounts, like the fiat on-ramp services mentioned above. Traders can then trade the deposited fiat money for a paired cryptocurrency. 

Fiat-crypto pairs also enable traders to exchange their cryptocurrencies for a fiat currency. Fiat withdrawal channels on exchanges like this enable traders to withdraw the fiat currency to their banks, completing the fiat-crypto connection. Crypto pairs for fiat currencies like the British pound, Nigerian Naira, and the Turkish Lira can be traded against cryptocurrencies on centralized exchanges like Binance.

Custodial Wallets

Unlike a decentralized exchange, centralized exchanges operate independently of a blockchain network. Centralized exchange platforms are essentially web2 platforms with an embedded algorithm for tokenization and simulated trading. That is, the real assets are not in constant movement during trading as seen in decentralized exchanges. To use a centralized exchange platform, a customer creates an account and is then assigned a wallet address for every crypto asset supported by the centralized exchange. This wallet is a front for the exchange-owned hot wallet.

Assets are held in the hot wallet but every customer is assigned their rightful share of the total fund held. The exchange maintains control of the wallets on its platform, which means that customers do not possess the private keys to their exchange wallets. To perform a withdrawal, customers send a request to the exchange administration to transfer their share of the funds in the exchange’s custody to a different wallet. If this request satisfies the provided conditions, the exchange proceeds to perform an asset transfer to the provided wallet from the custodial wallet. This process is automated in many exchanges, however, some centralized exchanges perform manual withdrawals as well.

To learn more about the differences between exchange wallets and non-custodial crypto wallets, you can check out our article on non-custodial crypto wallets vs. exchange-based wallets.

KYC Requirement

KYC (Know-Your-Customer) is unique to centralized exchanges, and describes an exchange’s customer profiling procedure. It is the exchange’s way of identifying a customer and ensuring that they are who they claim to be. The goal of KYC is to prevent criminal activities such as money laundering, fraud, and more. 

Most exchanges require personal data such as national identity cards and facial identification, along with registered phone numbers. 

What Happens When You Buy Cryptocurrencies?

When you swap cryptocurrencies in a decentralized exchange, the crypto asset is sent directly to your wallet. However, this is different on centralized exchanges since customers are technically not the owners of their wallets on centralized exchanges. When you place a purchase order for a cryptocurrency on a centralized exchange, the exchange updates your account balances to reflect the transaction once your order is filled (completely or partially). The purchased asset is added to your account while the asset used in the purchase is removed from your account. With the new purchase reflected in your account, you can now withdraw the asset to your non-custodial wallet.

If you buy a crypto asset using fiat on-ramp services provided by a centralized exchange, the on-ramp service provider charges you for the amount used in the purchase (including service charges) while the exchange runs an order book operation to make a cryptocurrency purchase and updates your exchange account with the purchased crypto asset. Like in the earlier case, you can now withdraw the asset to another wallet.

How to Choose a Centralized Exchange

Are you looking to trade on a centralized exchange? Here are some things you should consider before choosing a centralized exchange;

Supported Assets

If an exchange doesn’t support the asset you wish to trade, the other factors become of little use. Therefore, check the exchange to verify if the asset you wish to trade is listed on the platform. Also, check the pairs to ensure that the pairing also works for you. 

For a trader who doesn’t have any particular asset in mind, opting for an exchange with support for a higher number of assets might be the best decision after taking other factors like security into consideration. Also, as EVM networks may have different transaction charges, you might also consider the exchange’s support for an asset on cheaper EVM networks; this could also save you some withdrawal fees if you’re looking to move your assets on-chain.

Region Supported

Some centralized exchanges focus on a specific region, and their complete services might be unavailable in certain areas. When you’re looking to choose an exchange, it’s best to find one that has a presence in your region as they may offer region-specific fiat money deposit methods that come with lower fees. 

For example, crypto exchanges in India offer IMPS, NEFT, and RTGS for instant deposits, while users in Singapore may use local payment methods such as PayNow or GrabPay to purchase crypto on supported exchanges.

Security

How secure an exchange is depends on the security system it operates in handling the funds in its custody and also in securing user’s profiles. 

One thing to look out for is the 2FA security options available to secure user accounts. Ideally, the platform should offer 2FA options beyond SMS authentication, as SIM swapping can occur, where hackers take over your mobile number and use it to access your social media and exchange accounts. 

Since centralized exchanges hold users’ funds, it is also important to understand how they handle these funds to ensure that a hacker doesn’t gain access to the hot wallet and also to limit the losses if the hot wallet gets attacked. Some exchanges split users' funds into different wallets (including a cold wallet for extended storage) to reduce losses should any of the wallets get breached. Understand how the exchange you have in mind approaches this and consider this while choosing an exchange to use.

Proof of Reserves

CoinGecko has integrated the Proof of Reserves feature on its platform to enable investors to assess the financial credibility records of an exchange easily. This is available for most exchanges tracked on the platform, and is a consideration when it comes to calculating an exchange’s Trust Score.

Proof of Reserves (PoR) is a record of assets in an exchange’s (or any financial institution's) custody with a means of verification, which rose in relevance after a slew of centralized crypto institutions went insolvent. PoR enables customers to verify that their institution is actually in the custody of their assets as promised and not just on paper.

Proof of Reserves usually feature on-chain verification methods, and you can see the breakdown of the different tokens held by an exchange, as well as how their total assets compare against their 24h trading volume on GeckoTerminal.

Trading Volume

Trading volume is a show of activity on an exchange and to an extent, proof of liquidity. Using a liquid exchange can prevent a trader from running into losses from slippage due to poor liquidity. The availability of buyers also means your orders stand more chance of getting filled faster, compared to low volume (and low activity) centralized exchanges. 

It is also important to take a look at the order book, the order book spread, and density since trading volume data can be bloated. Also, note that liquidity levels might differ for different assets on the same exchange.

Fees

Centralized exchanges charge fees for trading and withdrawal. Check out the fees charged by the exchanges you have in mind for each of these activities. The difference in fees charged across exchanges for both activities might differ considerably. Trading on an exchange that charges less fees can save you a significant amount. 

However, it is important to consider this alongside other factors like security. Depending on the trader, security might be paramount, especially if you wish to hold your trading capital and profits on the exchange for an extended period of time. Otherwise opting for a cheaper exchange might be the most profitable move if you’re intending to buy crypto with fiat before moving your cryptocurrencies to a non-custodial wallet.

Trading Features

Consider the trading services available on the exchange. Some centralized exchanges are primarily spot trading platforms with no or developing support for other trading types like perpetual trading and futures trading. If you wish to simply perform a direct asset swap, then a spot trading platform works for you. 

However, if you are a futures, perpetual, or derivatives trader, then consider focusing your research on exchanges that offer these services. Also, if there are chances that you could experiment with other types of trading in the future, then creating an account on an exchange that offers spot trading alongside these other trading services might be the best for you. This is to avoid going through the process of creating a new account and moving your funds to another exchange when you wish to engage in more advanced forms of trading.

Additional Features

Contemporary centralized exchanges now offer extra financial services such as P2P trading facilities, passive income programs like staking, and even more services like launchpad for IEOs which could benefit their users. These services might come in handy for you as an investor, as you’ll have the opportunity to generate yield on your assets on the exchange.

Do note that as the exchange will be staking your assets on your behalf, your assets will still be held by the exchange. If you are looking to maintain control over your assets, you can explore other decentralized staking options such as liquid staking.

Centralized Exchanges (CEX) vs. Decentralized Exchanges (DEX)

We’ve briefly mentioned decentralized exchanges above, and here’s a quick summary of the key points of both CEXs and DEXs – check out our article on CEXs vs. DEXs for a more in depth comparison.

Final Thoughts

Centralized exchanges are arguably an easier alternative to decentralized exchanges, this is because, despite the complicated technology that it operates under the hood, it is able to abstract these procedures into straightforward processes. This makes it appealing to newer crypto investors who are looking for an easy way to trade cryptocurrencies. 

However, that isn’t to say that centralized exchanges are necessarily better than decentralized ones, as they both cater to different users. For users who want to maintain full custody over their cryptocurrency holdings, a decentralized exchange lets them trade directly from their crypto wallet.

Finally, as seen in what happened to FTX and Celsius, not your keys, not your coins. Once you lock your crypto assets into a centralized exchange, you’re essentially locking them into a wallet owned by the exchange and have given up custody of your own assets. Our recommendation is to move cryptocurrencies you’re intending to hold in the long-term into a cold wallet, while keeping only your trading funds on the exchange or in a hot wallet. 

This article is only meant to serve as an educational guide around some considerations when choosing a centralized exchange, and should not be treated as an exhaustive list. Always do your own research before depositing funds on any platforms. 

CoinGecko's Content Editorial Guidelines

CoinGecko’s content aims to demystify the crypto industry. While certain posts you see may be sponsored, we strive to uphold the highest standards of editorial quality and integrity, and do not publish any content that has not been vetted by our editors.

Learn more

Joel Agbo

Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. Follow the author on Twitter @agboifesinachi