How crypto exchanges work

An exchange is where most people buy their first crypto. It is a company that matches buyers with sellers and holds customers' money and coins. This lesson explains how that works and what you are trusting.

What happens when you buy

You open an account and prove who you are.
You deposit money from your bank.
You place an order, and the exchange matches it with someone selling.
Your account shows a crypto balance.

That balance is a record in the exchange's own database. The coins sit in wallets the exchange controls, usually pooled with other customers' coins. You hold a claim on the company. You do not hold the keys.

The order book

An exchange keeps a live list of offers called the order book.

Bids are the prices buyers are willing to pay.
Asks are the prices sellers will accept.

The gap between the highest bid and the lowest ask is the spread. A trade happens when a buyer and a seller meet on price. Lesson 15 covers the types of order you can place.

Simple "buy now" apps hide the order book. They quote one price, with their margin built into it.

Identity checks

Regulated exchanges must verify who their customers are. Expect to provide an identity document and proof of address. The process is called KYC, short for "know your customer". An exchange that asks for nothing may be operating outside the law.

Decentralised exchanges

A decentralised exchange, or DEX, is a set of smart contracts, not a company. You trade directly from your own wallet and keep your keys. There is no sign-up and no helpdesk. You take on smart contract risk, and nobody filters out fake or worthless tokens. Most beginners start on a centralised exchange.

An exchange is not a bank

Three events show what can go wrong:

Mt. Gox, 2014. This Tokyo exchange once handled more than 70% of all bitcoin trading. It suspended trading and filed for bankruptcy in February 2014, reporting about 850,000 bitcoin missing. Around 200,000 were later found.
FTX, 2022. One of the largest exchanges collapsed in November 2022. Its founder was sentenced to 25 years in prison for stealing more than $8 billion of customers' money.
Bybit, 2025. Hackers stole about $1.5 billion in a single attack in February 2025. The FBI attributed it to North Korea.

Government deposit insurance does not cover crypto held at an exchange. As US securities regulators put it, if a custodian "is hacked, shuts down, or goes bankrupt, you may lose access to your crypto assets".

Exchanges are a useful way in and out. Level 2 of this course teaches you how to hold coins yourself.