Exchanges are the gateway to cryptocurrencies but passing through that gateway comes with many considerations and potential pitfalls. With more than 200 digital currency exchanges listed on CoinMarketCap, crypto newcomers and even experienced traders have their work cut out in making the right choice. In this article, we’ll look at how to pick the best cryptocurrency exchange, considering critical questions such as individual needs, security, and usability.
7 Critical Considerations for Choosing the Best Cryptocurrency Exchange
1. Location, Location, Location
First off, you’ll want to make sure that the exchange you’re going to use is available and legally operating in your country. Due to the regulatory fog around cryptocurrencies in many countries, some exchanges don’t operate in all jurisdictions. In particular, US citizens may find that many exchanges don’t accept them as customers, and in the US, regulations can vary between states. Therefore, it helps if you find out a little about the regulatory position on cryptocurrencies in your own location.
Coinbase, Gemini and Bittrex are all regulated cryptocurrency exchanges in the US, with the first two options offering the opportunity to trade fiat for cryptocurrency. Coinbase is a popular choice for new users, although it offers a “Pro” option for more experienced traders.
Even if you think you can circumvent the exchange’s policies by using a VPN or similar, it’s not advisable. If the exchange isn’t operating legally in your location, then you’ll have little or no recourse if your funds end up being withheld, or if something else goes wrong.
2. Authenticity and Reputation
There are very few barriers to entering the cryptocurrency exchange market. Anyone can set up an exchange platform and a website if they know how. Therefore, it’s up to you to do your due diligence on the company you’ll be trusting with your crypto. Check whether or not the exchange is legally registered as a company. Look at their website to see if there is any verifiable information about the founders or management team. Is there a physical address or just a PO box number?
The crypto community is very active and vocal. So even a quick search for cryptocurrency exchange reviews on Google, Twitter or Reddit will usually turn up insights into the reputability of the exchange from existing users. Also, if an exchange is regulated, then it’s a fairly safe assumption that the company is reputable. For example, San Francisco-based exchange Kraken has an excellent reputation with regulators and law enforcement agencies across the world.
Digital currency exchanges have been the subject of some of the most infamous incidents in crypto. The Mt.Gox exchange hack in 2014 saw the loss of 740,000 Bitcoins, the equivalent of $430 million at the time. Most recently, Canadian exchange QuadrigaCX admitted it was missing around $137 million in cryptocurrencies after its founder died in late 2018, apparently taking all the exchange’s private keys to his grave.
At the time of writing, speculation is rife that the QuadrigaCX incident is an exit scam. Whether or not this turns out to be the case, the risk of exit scams and hacks makes it absolutely critical that you choose a secure cryptocurrency exchange. For the biggest exchanges, this means keeping any stored funds in cold storage, with sufficient security measures such as multi-signature access by a trusted group of people. Adequate insurance is another means of protecting lost funds. Later the company managed to retrieve access to the wallets but found them all drained empty.
Binance, Bitstamp and Coinbase all have great reputations for security. However, even the most trusted cryptocurrencies exchanges can fall prey to incidents. Therefore, one of the best measures is not to leave your crypto on an exchange at all. Unless you’re planning to trade it imminently, move it into a suitably secure cryptocurrency wallet. The safest option is a hardware-based cold storage wallet from a reputable company such as Ledger or Trezor.
4. Volume and Liquidity
Exchanges with higher trading volumes generally have higher liquidity, which means they are more likely to be able to fill your order quickly. Low volume and illiquidity is rarely an issue when trading major cryptos on a big exchange such as Binance, Coinbene or Kucoin. Coin Market Cap has ranking tables where you can see exchanges listed by trading volume.
However, larger exchanges receive many listing requests, resulting in a higher stringency in approval requirements. This can limit some of the smaller projects, so they are only listed on smaller exchanges with lower trading volumes. Therefore, low liquidity can become an issue.
5. Customer Support
Bigger exchanges have a larger customer base performing more transactions. Therefore, their customer support tends to be better developed than smaller exchanges. When choosing a cryptocurrency exchange, check to see what kind of support they have in place, in which languages and how you can reach them.
Again, the crypto community is usually very vocal around issues like poor customer support, so a quick search will usually give you an idea of the overall quality. Gemini and Bittrex are two exchanges that score consistently well on customer service.
6. Fees and Rates
Most exchanges charge maker and taker fees. A rule of thumb is that larger trades attract lower fees as a proportion of the transaction. Some exchanges are just more expensive than others. Although Coinbase is a good entry point for newcomers, more seasoned traders tend to avoid it because of the higher fees.
It’s also worth checking the cryptocurrency exchange rates between different platforms. Some crypto exchanges will offer better rates than others. If low fees are important to you, then Binance is a good bet. Using the Binance coin (BNB) offers the benefit of even lower fees.
The quality of user interfaces can vary widely between different cryptocurrency exchange sites. Some are a dizzying array of panels and tabs showing charts, tables, and candlesticks. Others are slicker and more beginner-friendly. While seasoned traders may prefer more information, relative beginners may appreciate a “less-is-more” interface. Poloniex used to be one of the worlds biggest exchanges, however it has slumped in trading volume as competition has emerged with friendlier user interfaces.
Whether or not you want to access the exchange from your smartphone is a further consideration. Not all cryptocurrency exchange platforms offer a mobile app, although many now do. The Binance mobile app is consistently rated among the best cryptocurrency exchange apps.
Sometimes, you may not have the luxury of considering all of the above factors when choosing your cryptocurrency exchange. Particularly if you are looking to buy one of the more esoteric altcoins. However, the best cryptocurrency exchanges are the ones that score highly on most, if not all, of the criteria on this list. As digital currencies remain mostly unregulated, then comparing cryptocurrency exchanges as part of your own due diligence should be your most critical priority. But at the end of the day, this is what makes the environment so exciting, volatile and full of potential.
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