A crypto exchange is a service that lets you buy, sell and convert cryptocurrencies, usually in exchange for a national currency or a stablecoin. Most people buy their first coins on one, and many keep coins there for convenience. The exchange does the work of matching buyers and sellers, holding the coins and keeping the account, and it earns money through fees and spreads.
An exchange is also a company, and that makes it a counterparty risk. The coins you hold on it depend on its security, its honesty and its solvency. This guide explains how exchanges work, how they charge, and what to check before you deposit.
Centralised and decentralised exchanges
A centralised exchange is run by a company. It keeps an order book, holds customer coins, verifies identities and runs the trading engine. Most large exchanges are centralised, and they offer the most convenient way to buy and sell.
A decentralised exchange is built from smart contracts on a blockchain. Trades happen between wallets, and users keep control of their coins while trading. This reduces counterparty risk, but it brings the risks of smart contracts, of pricing in pools rather than order books, and of using a wallet correctly. Decentralised exchanges are less forgiving of mistakes, because there is no support desk to reverse a bad transaction.
How an exchange makes money
Exchanges earn from trading fees, usually a percentage of each trade, which may be lower for frequent traders or for holders of the platform's own token. They also earn from the spread between the buy and sell price, from withdrawal fees, from interest on customer balances, and from listing fees charged to some projects.
Fees are the main cost to check. A 0.5 percent fee on each side of a round trip costs 1 percent before any spread. On a small trade, a fixed withdrawal fee can be a large share of the amount sent. Read the full fee schedule, not only the headline trading fee.
A worked example: the cost of a round trip
Suppose you buy 1,000 worth of a coin on an exchange that charges 0.5 percent per trade and has a spread of 0.2 percent. You then sell the same amount straight away.
| Step | Amount | Cost |
|---|---|---|
| Buy, fee at 0.5% | 1,000 | 5 |
| Spread, assumed 0.2% on the buy | 1,000 | 2 |
| Sell, fee at 0.5% | 995 | about 5 |
| Spread, assumed 0.2% on the sell | 995 | about 2 |
| Total cost, approximately | 14 |
You would lose about 1.4 percent of the amount in a round trip, before any price change. The exact numbers depend on the exchange and the coin, but the arithmetic is the same. Small trades and frequent trades magnify these costs.
Custody: who holds your coins
Most exchanges hold customer coins in their own wallets, which means you do not control the keys. Your balance is a claim on the exchange. Some exchanges keep most coins in cold storage and a smaller amount in hot wallets to pay withdrawals, which reduces the risk of a single hack. The split is not always published, and it is worth asking.
If you want control over the coins, you withdraw them to a wallet you hold the keys to. The guide on crypto wallets explains the difference between custodial and self-custody.
The track record
Crypto exchanges have a history of failures. Some were hacked and lost customer coins. Others froze withdrawals or collapsed when their own finances failed, and customers were left with claims that took years to resolve, or lost money altogether. These events are not ancient history, and they are the reason exchange choice matters.
When checking an exchange, look for its track record. Has it been hacked? Has it frozen withdrawals? Who regulates it, in which countries, and does it hold licences in the country where you live? Does it publish any independent verification of its reserves?
Proof of reserves
Some exchanges publish a proof of reserves, a report that shows the coins they hold. A proof of reserves can be useful, but it has limits. It may show assets at one moment without showing liabilities, it may not prove that the customer balances are fully covered, and it depends on the method and the auditor. Read the method, and ask whether the report has been checked by an independent firm.
A proof of reserves is evidence, not a guarantee. An exchange can publish a good report and still fail.
Withdrawals and limits
Check how withdrawals work before you need them. Some exchanges have daily limits, verification requirements that take time, or fees that rise in busy periods. A slow or restricted withdrawal can matter a great deal in a crisis, because it is when most people try to take their coins out at once.
Test the withdrawal process with a small amount before you rely on it. Note the network fee and the time it takes.
Fees on the way out
Fees are often charged at the moment you leave, not only when you trade. Withdrawal fees can be a flat amount per coin, which hurts small withdrawals most, and some exchanges add a conversion charge when you take money out in a different currency. Network fees for sending coins to your own wallet are separate again, and they depend on the network's congestion at the time. Add the exit cost to the round-trip cost before you decide whether a holding is worth keeping on the exchange. Compare the full cost of leaving with the cost of the alternatives, such as a wallet you control.
Identity checks
Most regulated exchanges require identity verification before you can deposit or trade larger amounts. The process can take days, and it may ask for documents and a live check. This is a sign of a regulated service, not a flaw, but it means you should not leave verification until the day you need the money.
Scams around exchanges
Fake exchanges and fake support accounts are a common scam. A site that looks like a known exchange may be a copy designed to steal your login and your deposits. Always type the official address yourself or use a bookmark, check the URL carefully, and be wary of anyone who contacts you first about your account. The guide on crypto scams lists the common forms.
Checklist before you deposit
- The exchange's licences and regulation in your country.
- Its track record: hacks, frozen withdrawals and any unresolved claims.
- The full fee schedule for trades, deposits, withdrawals and any conversion.
- Who holds the coins, and what happens to them if the exchange fails.
- Whether a proof of reserves exists, who checked it and how.
- The verification process and how long it takes.
- A small test withdrawal, to confirm the process works.
Key takeaways
A crypto exchange lets you buy, sell and hold coins, and it earns through fees and spreads. Centralised exchanges are convenient and carry counterparty risk, while decentralised exchanges give control and carry smart-contract and self-custody risk. The full fee schedule matters more than the headline rate, and the custody arrangement tells you what you own. Check licences, track record, reserves, withdrawals and verification before you deposit, and never leave large sums on any platform longer than you need to.
This guide is for general information, not financial advice. See the disclaimer.