What are cryptocurrency exchanges and how to choose one

What is the criteria for choosing a cryptocurrency exchange? Here's a check list of features to look for.
May 06, 2022 - Cynthia Chung

Crypto exchanges are platforms where you can buy and sell cryptocurrencies, stablecoins and altcoins. It’s also where you can exchange your cryptocurrency for another - such as converting Bitcoin to Ether or purchase cryptocurrencies with fiat currencies like the US dollar, or simply a place to store your cryptocurrency funds. 

 

What to look for in an exchange

 

Accessibility 

 

How familiar with trading are you? 

 

Where are you based? Your location may prevent you from buying and selling crypto due to regulations. For example, China has banned crypto exchanges and citizens from accessing them, The Reserve Bank of India has recently denied recognition of cryptocurrencies, therefore they are not legal in the country right now. 

 

In the U.S., cryptocurrencies are legal but there are regulatory hurdles around the asset. For example, New York requires merchants to register for a BitLicense before they can run their operations in the state and merchants can only offer certain coins. Other states do not have legislations as strict as New York but currently a total of thirty one states have pending legislations related to digital asset regulations, according to the National conference of state legislatures (NCSL). 

 

Security features

 

The harder it is to create an account with an exchange, the better. Do your research to determine if the exchange you’re choosing is secure and legitimate. This will ensure your funds are safe. A few things to look for are:

 

1. Two-factor authentication (2FA) is a MUST to provide an extra layer of security for signing into your exchange account beyond entering a password. Users are required to sign in with their username and password and provide further information to verify their identity (such as an answer to a security question, or biometric data). 2FA is linked to a one-time code generated on a mobile application or other device. This code is account-specific and constantly changed and only stored on the device on which you installed the application. Hackers will have to obtain the latest version of your code. 

 

2. Multi-signature arrangement is an enhanced version of 2FA. In this case, the crypto exchange requires you to input more than one private key/ cryptographic signatures to access funds and confirm transactions. This is most ideal for retail investors to secure cryptocurrencies accepted for payment as the distributed keys make it possible for two or more users to sign in as a group. And ensures that a hacker cannot hack the multiple keys. They can also view the details of transactions and funds as well as make unanimous group decisions. 

 

Some exchanges have insurance policies for users to protect them in case of a hack or fraud on its platform. For example, Coinbase has an insurance policy valued at US$ 255 million to protect users’ assets. Binance, Bittrex, Gemini and FTX also offer insurance policies. 

 

Looking into how the exchange stores assets offline or cold wallets. Otherwise, it’s wise to store the majority of your digital assets in your cold wallet to be safe.  

 

Conduct your research to determine whether the exchange you are choosing is a legitimate and secure platform. The authenticity and security of a platform will help you determine if your funds would be safe with the crypto exchange. Traders have lost billions of dollars to scam platforms. Hence, ensure you check the reputation of the platform and the various security protocols they have in place to secure your data and funds.

 

Fees

 

Transaction fee requirements differ from exchange to exchange so it’s crucial to ensure the platform you choose doesn't have hidden fees. 

 

Liquidity

 

Crypto exchanges should have a high volume of orders in its order books everyday. This indicates that the exchange has a large and active user base and assets on the exchange. If there’s only a small volume of orders to show, it means that few people are willing to trade on the platform and you have a smaller chance of making a trade. Note that more popular exchanges have the largest trade volumes. 

 

Observing volume patterns can also help you gauge market strength of specific crypto assets. This would come in handy especially during volatile times. 

 

Looking into how the exchange stores assets offline or cold wallets. Otherwise, it’s wise to store the majority of your digital assets in your cold wallet to be safe.  

 

Fees

 

Transaction fee requirements differ from exchange to exchange so it’s crucial to ensure the platform you choose doesn't have hidden fees. 

 

Liquidity 

 

Crypto exchanges should have a high volume of orders in its order books everyday. This indicates that the exchange has a large and active user base and assets on the exchange. If there’s only a small volume of orders to show, it means that few people are willing to trade on the platform and you have a smaller chance of making a trade. Note that more popular exchanges have the largest trade volumes. 

 

Observing volume patterns can also help you gauge market strength of specific crypto assets. This would come in handy especially during volatile times. 

 

Coins available to buy and sell

 

Does the crypto exchange have the crypto you want? No crypto exchange offers all the trading pairs you’re looking for. 

 

If you’re looking for large cap coins, you’ll be likely to find them on popular crypto exchanges. You can hedge the volatility of cryptocurrencies with stablecoins. For example, USDT is a USD-backed fiat cryptocurrency, which means there are actual funds in reserve at financial institutions to be used as collateral.

 

If you’re looking for more niche and lesser-traded crypto, you’ll be more likely to find them in smaller exchanges. 

 

Educational resources

 

Educational resources are especially handy for crypto beginners so they can learn step-by-step how to navigate the exchange and its functions, gain insight on different cryptocurrencies, digital assets and more. 

 

Weighing all factors

 

There are additional factors you can factor into your decision such as user interface, how comfortable you are with navigating the exchange and its features. Consider the quality of customer services, how quickly they respond, you cannot afford slow responses especially as crypto markets move quickly and your assets are at stake. 

 

Try out several reputable exchanges before settling for the best one for you in the long-run, you can even opt to engage with several that offer different benefits (i.e. staking rewards) for the best crypto trading experience. 

 

Photo: Unsplash

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