Where crypto is actually bought and sold
This module exists because almost every guide tells you to "use an exchange" without ever explaining what one is. There are two completely different kinds and they fail in completely different ways.
The basic problem an exchange solves
You have pounds or dollars. You want Bitcoin. Somebody else has Bitcoin and wants pounds. An exchange is simply a place where the two of you can find each other and agree a price.
That is it. Everything else is detail about how you find each other, and crucially, who holds the money while it happens.
The two kinds, and this is the distinction that matters most
CEX is short for centralised exchange. DEX is short for decentralised exchange. You will see both abbreviations constantly and now you know what they mean.
How a centralised exchange actually works inside
When you deposit money, the exchange credits a number to your account in their own database. That number is not on any blockchain. When you buy Bitcoin from another user on the platform, no blockchain transaction happens at all: they simply decrease one internal number and increase another.
This is why trading on a CEX is instant and costs no gas. You are not touching the blockchain. You are trading IOUs inside a company's ledger.
A real blockchain transaction only happens at two moments: when you deposit crypto in, and when you withdraw it out. Everything in between is internal bookkeeping.
The order book, explained properly
A centralised exchange matches buyers and sellers using an order book: a live list of everyone who wants to buy and everyone who wants to sell, and at what price.
A market order says "buy now at whatever the best available price is". It fills instantly by taking the cheapest sell offers. A limit order says "buy only at this price or better", and it sits in the book until somebody meets it, or forever if nobody does.
How a decentralised exchange works, which is completely different
A DEX has no order book and no buyers waiting. Instead it has a liquidity pool: a smart contract holding a pile of two tokens, say ETH and USDC, deposited by ordinary people who earn a share of the fees.
When you swap, you are not trading with a person. You put ETH into the pool and take USDC out. The contract calculates the price using a formula based on how much of each token is in the pool. Take a lot of USDC out and there is less left, so the price of the remaining USDC rises automatically.
This is called an automated market maker, or AMM. There is no counterparty deciding whether to trade with you. There is a pool and a formula, and it will always give you a price, which is why a DEX can list a token five minutes after it is created.
Which should a beginner use, honestly
A regulated centralised exchange, for your first purchase, without hesitation. You need to convert real money into crypto, and a DEX cannot do that: it can only swap one crypto for another. You need somewhere to start.
DEXs become relevant later, when you want a token no exchange lists, or when you specifically want to trade without handing custody to anyone. They are not more advanced in a snobbish sense. They genuinely require you to understand approvals, gas and slippage first, and getting those wrong is expensive.
- You are converting real money into crypto for the first time
- You want a simple interface and a support email
- You want the protection of a regulated company
- You are actively trading and value instant, gasless execution
- You want a token no exchange has listed
- You refuse to hand custody to a company, on principle
- You are already comfortable with approvals, gas and slippage
- You are in a country where exchanges will not serve you
A third thing you will hear about: peer to peer
P2P platforms match you directly with another individual who wants the opposite trade, often paying by bank transfer or cash. The platform holds the crypto in escrow while payment clears. This is common in countries where banks will not deal with exchanges.
It works, and it carries counterparty risk on every single trade, plus a genuine risk of receiving money that turns out to be stolen, which can get your bank account frozen. Treat it as a last resort rather than a starting point.
What "liquidity" means, since it decides your price
Liquidity is simply how much is available to trade. High liquidity means you can buy or sell a meaningful amount without moving the price. Low liquidity means your own order pushes the price against you.
A concrete example. If a pool holds 500,000 dollars of liquidity and you try to buy 50,000 dollars of the token, you are buying a tenth of everything available. The price will move sharply against you, and you may pay several percent more than the quoted price. The same trade against a 500 million dollar pool would barely register.
BEFORE YOU MOVE ON
Common questions
What is the difference between a CEX and a DEX?
A CEX is a company that holds your money and matches trades in its own database. A DEX is a smart contract that swaps tokens straight from your own wallet, with nobody holding your funds at any point. A CEX can convert real money into crypto; a DEX can only swap crypto for crypto.
What does CEX stand for?
Centralised exchange. DEX stands for decentralised exchange.
Is my crypto safe on an exchange?
While it sits there you own a claim against a company rather than the crypto itself. Regulated exchanges fail rarely, and FTX was not an unknown name. Anything you are not actively trading belongs in a wallet you control.
Can I buy crypto with a bank card on a DEX?
No. A DEX only swaps one crypto asset for another. Converting real money into crypto requires a centralised exchange or a similar regulated on ramp.
What is a liquidity pool?
A smart contract holding a pile of two tokens, deposited by users who earn a share of trading fees. When you swap on a DEX you trade against the pool rather than against another person, and the price comes from a formula.
Risk warning: crypto is highly volatile and largely unregulated. You can lose everything you put in. Nothing here is financial, investment or tax advice.