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A cryptocurrency exchange is a trading venue that allows its clients to buy, sell (and sometimes store) digital currencies. Cryptocurrency exchanges are online platforms (digital marketplaces) where traders can exchange cryptocurrencies for other cryptocurrencies or fiat money (like the USD or Euro). The process of exchange is usually based on the market value of the particular asset. However, exchanges can differ in their pricing process. For example – some may provide a flat rate but charge additional fees depending on the preferred payment method, while others may provide a total sum that has everything included (rate, trading fee, payment fee, and others).
Cryptocurrency exchanges are very similar to traditional stock exchanges. For example, buyers and sellers can place limit orders or market orders, and the brokering process works the same way it would with any other type of asset. When a market order is selected, for example, the trader authorizes the platform to take care of his coins and find the best possible price to execute the trade at. With a limit order, on the other hand, the trader instructs the exchange to jump into a trade only if the price is below the ask or above the bid (depending on whether they are selling or buying), at the particular moment. The cryptocurrency exchange serves as an intermediary that helps with the order matching and fulfillment and collects fees. However, at the same time, cryptocurrency exchanges have some core differences, when compared to traditional exchanges. For example – the majority of cryptocurrency trading venues are unregulated.
There are two main types of cryptocurrency exchanges – centralized (CEX) and decentralized (DEX). The majority of digital asset trading platforms worldwide are centralized. The idea of centralization refers to having a middle man (the exchange operator) who helps conduct transactions. This means there is one central authority that governs the whole process, much like traditional stock exchanges. This type of setup is widespread also within other financial institutions like banks and brokerage companies. In general, the buyers and sellers trust the exchange operator to take care of the trades' execution and fulfillment. Decentralized cryptocurrency exchanges, on the other hand, have no authority to control them. They are an alternative that cuts out the middlemen and creates a “trustless” environment, based on smart contracts. The idea behind decentralized exchanges is to serve as a P2P (peer-to-peer) trading venue. At the time of this writing, though, decentralized cryptocurrency exchanges are significantly behind the centralized ones in terms of trading volume, users’ base, and overall usability. Apart from CEXs and DEXs, however, there are also websites that are not cryptocurrency exchanges, such as https://localbitcoins.com/ which also allow to buy and sell digital assets. However, if you want to take advantage of professional trading tools and high liquidity, it is always better to choose between some of the leading cryptocurrency exchange service providers.
To engage in trading on a centralized exchange, in most cases, a user has to go through a series of verification procedures to authenticate their identity. That is because most of the leading centralized digital asset exchanges adhere to KYC and AML policies. What this means is that the users are required to submit personal details and scanned documents that can verify their identities, such as government-issued ID or Passport, address (and a utility bill that confirms it), telephone number, email, and others. Although this goes against one of the core ideas of cryptocurrencies, in the face of anonymity, it ensures better protection of users’ funds and a higher level of security. Once the authentication is successful (the time needed for identity verification depends according to the policy of each exchange, but most of the time is within 24 and 72 hours), an account is opened, and the user can fund his account and start trading. Regarding account deposits, it is worth noting that different exchanges support different payment methods. Some support direct bank or wired transfers, while others allow for using credit and debit cards. Those types of cryptocurrency trading venues are known as entry-level exchanges. Some exchanges, however, require the account deposits to be in cryptocurrencies.
Although cryptocurrency exchanges had been around since the early 2000s with the birth of the first digital currencies (like E-gold), they became popular with the rise of Bitcoin and the following increased interest in the digital asset class. At the time of this writing, there are more than 160 cryptocurrency exchanges listed on Nomics. In reality, digital asset trading venues pop up almost daily. While some fail along the road, the overall number of cryptocurrency exchanges follows a positive trend.
This is, probably, the most common question when it comes to cryptocurrency trading. The biggest issue with cryptocurrency exchanges is how to find a service provider that is secure, credible, and transparent. In the years since the introduction of Bitcoin, there have been numerous cases of cryptocurrency exchange businesses that have closed shops due to internal or external reasons. Some have suffered from massive hacker attacks, while others ended up being scam schemes. In most cases, those who were affected the most were the traders who ended up losing their funds. Reports point out that more than $1.7 billion were stolen from exchanges in 2018. According to industry experts, the figures for 2019 are projected to exceed $4 billion.
That is why choosing a cryptocurrency exchange to execute your trades on is such an important matter. Although, nowadays, the number of active cryptocurrency exchanges is rising exponentially, the issue with finding a reliable service provider still remains.
To help you find out what is the best cryptocurrency exchange to serve your needs, here are five things to look for:
The first thing to look for is the exchange’s history. Go as far back as possible to find out whether the platform had been involved in some shady business activities. Try to understand as much as possible about the background of the founders and the operating company. Sometimes, the operating entity is covered in secrecy or hidden behind circles of other companies, just like the cases with C2CX and GDAC.
Bear in mind that obtaining the complete history for an exchange often is a tough task. There are lots of service providers that share very limited information or even try to cover their tracks intentionally. Let’s take BTCsquare or Livecoin, for example – the cryptocurrency exchanges don’t share anything related to their founders, operating company, or official address. This often is a red flag, so make sure to stay away from such service providers.
Another essential thing is to try finding out whether the particular exchange had been subject to hacker attacks or governmental investigations. If it had been investigated or compromised, analyze what the exchange’s response was and how it navigated the situation. This can be either an alarming or a positive sign. For example, although Nova Exchange suffered a hacker attack, it faced the problem publicly and notified all its users immediately, which helped mitigate the consequences. The platform also went on to help other victims of hacker attacks like the token projects from the failed Cryptopia, by listing them for free. Alternatively, let’s look at Zaif, for instance – although the exchange was hacked, it made everything possible to compensate its clients for the suffered losses and worked in close cooperation with local authorities to track the cybercriminals. Some of the leading cryptocurrency exchanges like Binance and Bitstamp have also been hacked. However, this didn’t stop them from becoming leaders in the industry. On the other hand, trading platforms like Coincheck found it hard to recover from the security breaches they suffered. In a nutshell – try to learn as much as possible about the exchange’s history of security issues, and more importantly, how it reacted in crisis situations. This can serve as a good indication for its plans, reliability, and attitude towards its user base.
Think of this, also like the way the exchange treats you, as a potential client. Does it find it necessary to reveal important details that may help you make an informed decision? Does it face the public openly by stating who runs it, and what are their long-term plans? Does it have a solid media appearance or just paid PR articles? Are there any questions that remain unanswered after going through all the information on the platform’s website?
At Nomics, we say that “Transparency must be trustless.” That is why we have created our Transparency Rating system, which helps users distinguish the exchanges that are open to the public, from those covered in secrecy (examples of exchanges with the highest transparency rating on Nomics are Deribit, Switcheo, Binance and others). However, many cryptocurrency trading platforms fall in the second category. To avoid falling for scam schemes or unethical service providers, make sure to focus on the information coming directly from the exchange. You can start with the “Terms and Conditions”, for example. We have reported about several exchanges (OOOBTC, BTCBox, and others) that copy their terms directly from one another without changing even a slight bit of the information. However, this is not the worst case. Bitbegin, for example, has a clause in its terms page that requires the client to pay them “at least $1 million in compensation” should they breach the agreement.JEX has a similar clause, but the compensation there is estimated at“at least $2 million.” Considering the fact that most of the time, these agreements are very general, written in poor English, thus a subject to wide speculation, users can often end up owing the exchange compensations. Do your best to stay away from such platforms.
Another good thing to do is to get familiar with the feedback from the exchanges’ existing clients as this is the most accurate and objective way to tell whether the particular service provider is reliable. A good starting point is the user-generated exchange reviews available on our platform. Take Binance, Kraken, or Bitstamp’s pages, for example. Plenty of users describe their experience with the platforms and openly admit if they have had some issues as well. Also, make sure to check Bitcointalk, Reddit, and Trustpilot to find out whether there are unsatisfied customers and what they are most often frustrated about. If the exchange lists ICO tokens, try to find out what is the feedback from the project owners. In the case of Tradesatoshi, for example, thanks to information from the teams running projects, listed there, the exchange was exposed to doing unethical practices like delisting, without prior notice, and stealing the tokens, left in the platform.
Bear in mind that the reliable cryptocurrency exchange won’t hesitate to provide information about its official address, working hours and the team behind the platform. That is its way to say that it is open to communication and is willing to assist you in case you need so. Unfortunately, the majority of the platforms avoid providing such information. On the other hand, they often request from you to adhere to their KYC procedures and provide sensitive personal information such as a copy of ID or a Passport, official address, telephone number, etc. Make sure to avoid registering for platforms which don’t find it necessary to be fully transparent with their clients, while at the same time request the same from you.
Security is the biggest pain point when it comes to cryptocurrency exchange businesses. While no platform is completely immune to hacks or security breaches, some are safer than others or at least try their best to protect their clients.
When searching for the best cryptocurrency exchange to trade on, try to find out as much as possible about the employed security measures. Bear in mind that the most widely adopted protection is two-factor authentication, so it is safe to say that it is the industry minimum. However, a big number of the platforms don’t go past that, which is the reason why, in recent years, many clients have lost their funds.
Don’t forget that even the most secure platforms can’t ensure 100% protection of your funds if you don’t help them. The easiest way to do that is to ensure the safe storage of your coins by keeping them in an offline (cold) wallet. Many investors underestimate the importance of this and keep their coins in hot wallets, integrated into the exchanges’ websites. Although most of the platforms migrate the majority of the funds from users’ accounts to offline wallets, they usually keep 5% to 10% online, as capital buffers for immediate transactions. However, don’t forget that it is always better to rely on yourself, rather than the service provider.
One of the key selling points of cryptocurrency exchanges is the trading volume they generate. Generally speaking, the higher the levels of trading volume, the lower the volatility and the risk for market manipulation that is likely to take place on the exchange. That is the main reason why shady cryptocurrency exchanges often provide false information regarding their trading volume. We have already discussed the problem with fake liquidity present within the majority of trading platforms and how it affects their clients. In fact, that is the main reason why we created the Transparency Rating system. That way, our audience can easily find out which exchanges provide real data and which remain in the shadows.
So, what risks does an investor face when using a low-liquidity exchange? First of all, there is the risk of price instabilities. Next, the investor risks missing a key trading opportunity due to the lack of buyers or sellers. You can find out more about this on forums like Reddit and Bitcointalk, where clients of shady exchange service providers report about placing orders that are left pending for days.
Here we should also mention volatility as another crucial consideration. Because of the time it takes for transactions to be completed, the price of a given coin can change between the time the transaction is initiated and the time it is finalized. The higher the trading volume and the faster the transaction can be processed, the less likely it is for such a fluctuation to occur.
Of course, traders should also base their choice on the features that the exchange provides. For example – traded markets, supported payment methods, charting tools, identity verification requirements, platform usability and accessibility, geographical restrictions, etc.
Let’s start with traded markets. Some cryptocurrency exchanges (Coinbase included) are focused on offering only leading coins like BTC, ETH, LTC, XRP, and so on. Others, on the other hand, operate in the niche of more exotic altcoins, listing upcoming tokens. However, most of the biggest exchanges, like Binance, and Gemini, offer a variety of digital assets, which grants flexibility.
When it comes to the supported trading methods, it is worth noting that some cryptocurrency exchanges (known as “entry-level”) support fiat deposits, while others offer only cryptocurrency deposits. Entry-level platforms usually support various methods such as bank transfers, credit and debit cards, gift cards, PayPal, and so on. If you choose to fund your account via a wire transfer, you should know that the procedure is quite slow and will take several days to complete. Credit and debit card account funding, on the other hand, happens instantly. However, it is usually associated with higher fees (up to 5%) and requires identity verification.
If you are an advanced trader who aims at using professional trading tools, then you should get familiar with the trading features, offered by the exchange. Many platforms provide simple functionalities like buying and selling, without even supporting basic charting tools. However, if your trading strategy employs multiple indicators and hand-picked trading mechanics, then you should choose one of the more advanced exchange service providers (or use third-party software for charting).
It is also a good idea to analyze the exchange’s usability. The good user interface and smooth user experience usually are signs of a well-developed platform. If you plan to trade on the go, then make sure to find a platform that has a fully-functional mobile app.
Some exchanges also impose restrictions depending on the users’ location. Most of the platforms have a list of high-risk countries that they don’t operate on. However, although the majority of the platforms try to expand their operations worldwide, at the time of this writing, most of them serve local markets (US, EU, Asia, etc.). Often is the case when some European or Asian cryptocurrency exchanges don’t serve US clients due to the strict regulatory landscape in the country. Yet, when it comes to geographical restrictions, the biggest service providers are usually the best choices, as they are usually open to clients from all around the world (aside from the high-risk markets).
Here we should also mention the platforms’ fee policy. Most cryptocurrency exchanges should have fee-related information on their websites. Before setting up an account, make sure to get familiar with the deposit, withdrawal, and transaction fee structure. For example, when it comes to account funding, most individuals prefer wire transfers as they are cheaper, although a bit slower. For those who want to start trading instantaneously, most exchanges offer support for credit/debit cards. However, in this case, the general principle is that you will be charged a higher fee (up to 5%). When it comes to trading fees, it is worth noting that most exchanges employ a maker-taker model. A maker fee is paid when the user generates liquidity (places a limit order), while a taker fee is paid when the trader removes liquidity (places a market order). Fees are usually a proportion of the transaction and can range from 0.1% up to 0.5%. However, in some instances, the transaction fees can be lowered. Clients who generate higher trading volumes enjoy lower fees, while some exchanges, like Binance, for example, offer fee reduction for the holders of their token.
So last, but not least – don’t forget about customer support. This is one of the things that many service providers struggle with, and users often report about. Make sure to use a platform that supports several communication channels such as email, live chat, telephone, social media, and so on. Bear in mind that unresponsive customer support is a common thing and in cases where a user can’t see his funds in the account, it can be very stressing.
The good thing today is that the cryptocurrency exchange niche isn’t the Wild West that it used to be, a few years back. Today, there is plenty of information to help you find the perfect service provider, according to your needs – just follow the steps mentioned above, and you will be in safe hands.
Cryptocurrency exchanges usually restrict investors who want to trade larger amounts of cryptocurrency via the conventional way. They do so because, currently, although on the rise, the trading volume on most cryptocurrency trading platforms still remains relatively low, when compared to traditional FX and stock markets. Due to the low trading volume, investors who want to place large orders (also known as “whales”) can significantly affect the price of a particular digital asset. This is harmful to the market and the trader, himself, as the price of the instrument can be moved even before the trade is completed (this is also known as “slippage”). Aside from that, exchanges might need to divide the big order into a few smaller ones, which can end up executed at different prices and at different times. So, in situations, where the value of the order placed is relatively significant to the amount of the daily trading volume, generated on the particular exchange, the investor is required to find another way of executing his trades.
So, when is an order considered a “big” one? Hedge funds, high-net-worth individuals, and wealth management companies, for example, often trade millions worth of cryptocurrencies at once. However, traditional cryptocurrency exchanges offer OTC trading services to investors who want to trade over $100 000 worth of cryptocurrencies, in the case of Poloniex (Circle), $250 000 in the case of Bittrex, and 20 BTC for Binance’s users.
The most preferred way to exchange larger amounts of cryptocurrency is through an OTC desk (over-the-counter). The OTC trading process mechanics is based on big chunks of buy and sell orders known as block trades. What OTC desks do is find buyers and sellers with significant portfolios and pair them together to conduct a trade. That way, the parties can fulfill their trades at once and at a fixed price, without affecting the trading process for smaller investors on the exchange. Another benefit that OTC trading provides is shorter withdrawal times. Instead of having to wait for a few days, traders can withdraw at once and, in most cases, within 24 hours.
There are several ways for one to get involved in OTC trading, such as via an electronic chat, telephone, and cryptocurrency ATMs. Traders prefer these ways due to anonymity, as the trades aren’t audited or reported to external agencies. However, a big part of the OTC trading activity takes place on cryptocurrency exchanges, as well. Some platforms like Binance, Coinbase, and Kraken, for example, provide such a service. To benefit from it, the investor should set up an account and pass an identity verification, in accordance with the KYC and AML policies, adopted by the particular exchange. Once the account is successfully established, the trader can proceed with requesting a quote. The OTC desk will then try to find a match for the quote. If it can’t find a match, it gets back to the trader with other terms, similar to his. Once both parties agree on a price, the trade is executed.