Understanding the Types of Crypto Exchanges

In order to choose the best exchange for your needs, it is important to fully understand the types of exchanges.

Central exchange

The first and most common type of exchange is centralized exchange. Popular exchanges that fall into this category are Coinbase, Binance, Kraken, and Gemini. These exchanges are private companies that offer platforms for trading cryptocurrency. This exchange requires registration and identification, also known as the “Know Your Customer” or “Know Your Client” rule.

The exchanges listed above all have active trading, high volumes, and liquidity. However, centralized exchanges do not conform to Bitcoin’s philosophy. They run on their own private servers, creating an attack vector. If the company’s servers were compromised, the entire system could shut down for some time. Worse, sensitive information about its users could be exposed.

The larger, more popular central exchanges are by far the easiest place to go for new users and even offer some level of insurance should their systems fail. While this is true, when you purchase on these exchanges, cryptocurrency is stored in your custody wallets, rather than your own wallet that you have the keys to. The insurance offered is only valid if the exchange is responsible. For example, should your computer and Coinbase account be compromised, your money will be lost and you will likely not be able to apply for insurance. For this reason, it is important to withdraw large amounts and practice safe storage.

Decentralized exchange

The decentralized exchange works just like Bitcoin. A decentralized exchange does not have a central control point. Instead, think of it as a server, except that every computer within the server is located around the world and every computer that makes up part of that server is controlled by a person. If one of these computers is turned off, it will have no effect on the entire network as many other computers will continue to run the network.

This is drastically different from a company that controls a server in a single location. It is significantly more difficult to attack something that is distributed and decentralized in this way, which makes such attacks unrealistic and likely to be unsuccessful.

Because of this decentralization, these types of exchanges cannot be subject to the rules of a regulatory authority as no particular person or group operates the system. Participants come and go so that there is no individual or group that a government or regulator can realistically pursue. This means that those who trade on the platform do not have to declare their identification and can use the platform in any way they choose, whether legal or not.

How we picked the best crypto exchanges

Investopedia assists those interested in cryptocurrency investments to make informed and safe decisions. We strive to provide our readers with unbiased reviews of the major Bitcoin exchanges for investors of all levels. The cryptocurrency landscape can be quite intimidating. We have selected exchanges that we believe are trustworthy, secure, easy to use and have a longstanding and proven level of quality.