What Is an Exchange?

A Bitcoin exchange is a platform where you can buy Bitcoin using regular money — dollars, euros, whatever your local currency is.

You create an account, verify your identity, link a payment method, and buy. The exchange holds your Bitcoin on your behalf, the same way a bank holds your cash. It shows up in your account balance. It looks just like any other app.

The most well-known exchanges include Coinbase, Kraken, and Binance. There are dozens of others depending on your country. They’re generally regulated, insured to varying degrees, and relatively straightforward to use.

So what’s the catch?

When Bitcoin sits on an exchange, the exchange controls it. Not you. You have a number on a screen that says you own Bitcoin — but the actual Bitcoin is held by the company. If that company is hacked, goes bankrupt, freezes withdrawals, or gets shut down by a government — your Bitcoin could be inaccessible or gone entirely.

This has happened. Multiple times. Mt. Gox in 2014. QuadrigaCX in 2019. FTX in 2022. Each time, ordinary people lost access to funds they believed were theirs.

Exchanges are a fine place to buy Bitcoin. They’re not a safe place to store it long-term.

The phrase the Bitcoin community uses: not your keys, not your coins. More on that soon.

Tomorrow: how to choose an exchange — what to look for and what to avoid.

— The Daily Bit