Module 1: Spot trading · Lesson 1 of 14

How a crypto exchange works

3 min read

A crypto exchange is a marketplace that matches people who want to buy a digital asset with people who want to sell it. On a centralised exchange, a single company runs the platform, holds customer funds and operates the matching engine that pairs orders together.

What a centralised exchange does

A centralised exchange (often shortened to CEX) bundles several services into one account:

Matching: its software pairs buy and sell orders in real time.
Custody: it stores the coins and cash you deposit, usually in a mix of online "hot" wallets and offline "cold" storage.
Fiat access: many let you deposit and withdraw ordinary currency such as pounds, euros or dollars.
Extra products: futures, savings products and other services, each with its own risks.

There are also decentralised exchanges, where trades settle directly on a blockchain from your own wallet. This course focuses on centralised exchanges, because that is where most beginners start.

Custody: who holds your coins?

When your coins sit on an exchange, the exchange controls the private keys, the secret codes that authorise spending on a blockchain. Your account balance is really a promise from the company that it owes you those assets. If the platform is hacked, freezes withdrawals or fails, you may not get everything back. That is why many people keep only what they actively trade on an exchange and move longer-term holdings to a wallet they control.

Example: you deposit 1,000 USDT and buy some bitcoin. The exchange's internal ledger now shows the bitcoin in your account, but no blockchain transaction has happened yet. Only when you withdraw does the coin move on-chain to an address you control.

KYC: proving who you are

Most regulated exchanges require KYC, short for "know your customer". You upload identity documents and sometimes proof of address before you can trade or withdraw larger amounts. KYC helps exchanges meet anti-money-laundering rules and makes it harder for criminals to use the platform. It also means you should only hand your documents to well-known, properly licensed platforms.

Risk: an exchange account is not the same as a bank account. Deposit protection schemes often do not cover crypto held on an exchange.

Key takeaways

A centralised exchange matches orders, holds your funds and often handles fiat deposits.
Coins left on an exchange are in its custody, so you rely on the company staying secure and solvent.
KYC identity checks are a normal regulatory requirement on reputable platforms.
Many traders keep only active trading funds on an exchange.

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Educational content only — not investment advice. Leveraged trading carries a high risk of loss.