Choosing the right cryptocurrency exchange can be one of the most important first tasks an interested trader or investor must perform. Choosing the wrong platform can potentially result in a road full of hacks, distractions, and unnecessary efforts.
When looking for the right exchange, interested parties must first know what they want to achieve. For example, is the goal of simply investing in the longer term or regularly swapping positions?
Investors could look for exchanges. These are platforms on which you can buy and sell digital assets yourself. For example, spot bitcoin (BTC) is the actual bitcoin that a person can buy, sell, or transfer to any exchange or wallet at will and hold for as long as desired.
Traders, on the other hand, may be interested in derivatives – trading products like futures and options that are based on the price movement of the underlying spot assets.
These products trade in contracts based on the price movement of the underlying assets and can be converted into cash or digital assets depending on the exchange. However, these contracts are local to the exchanges where they take place and therefore cannot be transferred to other locations.
Once the trader has set their goals, it can be crucial to research issues such as country regulations, stock market security, and a host of other issues.
Below is a list of 10 key areas to consider when choosing an exchange.
1. KYC / AML
Different exchanges conform to different laws and regulations based on their locations, practices and offerings. Some exchanges have the Know Your Customer (KYC) and Anti-Money Laundering (AML) methods, which require participants to provide personal information about themselves when creating an account.
These practices and requirements vary from exchange to exchange. Some platforms require KYC and AML to withdraw funds or lift certain restrictions, requiring customers to provide copies of photo ID and sometimes proof of residence. Other platforms require such customer verification during the account creation process.
Many crypto exchanges these days also prohibit customers residing in certain countries.
With the cryptocurrency space still largely a new industry, it’s important to know the reputation of any exchange of interests. Many exchanges have been involved in nefarious activity, hacks, and exit fraud, leaving users in a less than ideal situation.
It is important to do research on various exchanges, search for them next to the term “fraud” on Google and evaluate the results. Browsing the exchanges on various forms of social media can also be helpful to see if complaints have been posted.
A look at the terms and conditions of each platform can also be helpful if you find that everything is alarming or out of place.
Each exchange has its own security method. Check whether the exchange offers two-factor authentication (2FA). If not, the replacement may not be acceptable under today’s security standards.
Also, check which type of 2FA is compatible. Google Authenticator, Authy, and Yubikey are three common ways for 2FA, as they arguably offer better security than mobile text-based 2FA.
Each exchange also has various other security measures that may need to be checked, such as: B. Reserves for cold stores and depot services.
4. Insurance fund
Users can also determine if their interest exchange has an insurance fund. Certain exchanges have means to compensate customers in certain circumstances.
Other exchanges are covered by the Federal Deposit Insurance Corporation (FDIC), which can protect a certain amount of US user funds.
5. Fiat exchange
Traders and investors will likely need a fiat-compatible exchange at some point in their careers that will allow them to transfer national currencies (USD, CAD, etc.) into the crypto world for trading purposes and out of the crypto world to cash out profits.
Some exchanges have different fiat options that are compatible with certain banks and some do not. It may be necessary to check which banking exchanges are being used and which types of fiat currencies are tradable.
6. Take advantage of the trade
Derivatives exchanges often offer leverage trading. Leverage essentially allows traders to borrow a certain amount of funds for trades based on the amount of funds they hold in the exchange.
Leverage can be important for traders looking to take larger-sized, short-term positions. Several exchanges offer 1x to 100x leverage, although different platforms may have different rules regarding liquidation levels and margin calls.
Trading platforms vary based on the number of participants using them at any given time, as well as the amount of each asset being traded. This aspect can be important as it affects how easily users can enter and exit positions.
If a trader wants to sell 100 BTC, he or she probably won’t be able to do so on a low volume exchange as there may not be enough sellers at the current listed market price, forcing the trader to sell at lower offers on the exchange .
Volume problems often make altcoin positions difficult on certain exchanges and make it difficult to buy or sell large amounts of those assets.
Checking the volume can be a daunting task at times as exchanges publish fake volume. One method is to look at the order book on different exchanges and note what amounts of each asset are in the order book and how far apart the price levels are.
Another way to evaluate the volume is to check out third-party websites that offer this type of data. Coin360, CoinMarketCap, and OnChainFX are three options that are used to list different types of volume data.
Asset prices also vary across multiple exchanges. Crypto assets can trade higher or lower on one exchange than another due to the location of participants (China-based exchanges can sometimes pump more), volume, and other factors. Finding these discrepancies can play a role when choosing an exchange, especially when it comes to altcoins.
Price differences can also be a red flag that a certain exchange can suffer from low liquidity / low volume.
9. Asset selection
Top digital assets like Bitcoin, Ethereum (ETH) and Litecoin (LTC) are widely available on most crypto exchanges. However, other smaller cap coins and tokens may not be available on certain exchanges.
As such, it can be important to know what crypto assets each exchange offers and how to choose the appropriate options.
Most exchanges charge a small fee for every trade. These fees vary by platform and are usually based on a percentage of each trade.
Fees may not be as important to investors as they are to traders. Traders buy and sell more frequently and charge fees more often, although this depends on the size of each trade versus the size of the investment.
Some exchanges also have withdrawal fees and limits.
Own research (DYOR) is one of the most important aspects of engagement in the crypto space – not just in terms of exchange, but across the industry.
The above 10 aspects can be good examples of things to consider and investigate when choosing a crypto exchange, although they vary from person to person based on their goals, values, and activities. Skepticism and research may prove to be more valuable than not in the young and developing crypto industry.
The views and opinions expressed herein are solely those of (@benjaminpirus) and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.