Become a better investor
Lesson in Course: Crypto (advanced, 5min )
Where do we buy crypto?
The first trade as a crypto investor is to convert our fiat currency (US dollar, Euro, Yen, etc.) into cryptocurrency. A centralized crypto exchange facilitates this trade by connecting us with someone selling their cryptocurrency for a fee.
Exchanges list cash-to-crypto and crypto-to-crypto exchange rates daily, much like the currency exchanges we see at international airports.
There are many crypto exchanges available, and many provide brokerage services. We can think about them as the following two categories, centralized or decentralized.
Centralized exchanges, or CEX, are digital platforms that serve as a middle man connecting buyers and sellers, providing custody, and handling our assets just as banks would. CEXs are currently the only exchanges that allow us to convert fiat into crypto and back. CEXs also enable us to trade one form of crypto for another.
Cryptocurrency can be lost if we forget the key to our digital wallet. A CEX safeguards the holdings and prevents this from happening by knowing us and tying our identities to the crypto we own. When we complete the first trade, exchanging dollars for crypto, the CEX creates a crypto wallet to store our crypto for us.
A decentralized exchange, or DEX, is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. A DEX does not store our personal information on a centralized server, nor does it provide middleman services.
In contrast to centralized exchanges (CEXs), decentralized platforms are non-custodial, meaning we remain in control of our private keys when trading on a DEX platform. Under set conditions, DEXs use self-executing smart contracts to record each transaction to the blockchain without a central authority.
This creates censorship resistance, so DEXs can't be shut down unless the entire blockchain that it's built on is shut down - which is virtually impossible to do as long as people are using it. DEXs allow us to access the crypto ecosystem in countries that have banned or restricted cryptocurrency trading.
Here is a short video covering the role of crypto exchanges in a little more depth:
This quick video discusses how decentralized exchanges work:
When getting into crypto for the first time, it is easier to start with a centralized exchange. The services will be familiar since the process is similar to traditional brokerages. We learn about it in the lesson on the crypto account opening process.
A decentralized exchange, or DEX, is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. A DEX does not store our personal information on a centralized server nor does it provide middleman services.
Centralized exchanges is a digital platform that serves as the middle man to connect buyers and sellers, and provides custody, or handles our assets just as banks would. CEXs are the only exchanges that currently allow us to convert fiat into crypto and crypto back into fiat. CEXs also allow us to trade one form of crypto for another.