When Bitcoin, the first and still the most popular cryptocurrency, was introduced in the wake of 2009, users, who were mostly developers, had to use the command terminal to make transactions, just like writing code. Later on, when eventually the mainstream community increasingly adopted blockchain technology, crypto exchanges were established that have created a market for cryptocurrencies and also offered a more graphical user interface for average users to buy, sell, send, and receive these new generation assets.
Key Factors For Choosing The Right Crypto Exchange
A crypto exchange essentially serves like a stock broker. Owing to the high demand, plenty of them have popped up in the United States and around the world. While choosing a crypto exchange, most investors put the price and features offered by the platform at the top of their priority list. However, no matter how attractive the fee and features may be, there is no substitute for a safe and secure platform.
Several large crypto exchanges including Tokyo-based Mt. Gox have gone into bankruptcy as a result of large cyberattacks.
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The following are some of the vital factors you should consider before zeroing in on your cryptocurrency trading account.
1. Reputation
First, visit the official website of the exchange and see what they say about themselves. Check the user reviews, and see how their services have fared in the past. To be safe, you should choose an exchange with at least 3 years of track record. See if they offer any options to verify if the coins they claim to possess are actually with them. Also, look for endorsements from reputed investors and see if the platform or the key people have any history of scams.
2. Security
As a rule of thumb, the harder it is to start an account with a crypto exchange, the better it is. You will have an easier time tracking down your disappeared digital assets with an exchange that has strict norms for offering accounts. Exchanges that use offline storage services, like cold wallets, offer more security, and so do additional authentication requirements for executing transactions.
3. Coins Supported
Well-known exchanges like Coinbase and Kraken support a large number of the most popular crypto assets including meme coins. If you want to trade one of the obscure coins in the market, you might have to choose an overseas exchange with questionable regulatory restrictions.
4. Liquidity
For easy transactions and fair market conditions, you must choose an exchange with sufficient liquidity. Only then would you be able to cash in on your trades when the assets in your account are appreciating or dump your holdings on time when they are losing value? In most cases, the larger the trading volumes of an exchange, the better the liquidity.
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5. Fee
Unlike regular stock broker accounts, crypto exchanges typically have transaction costs. The fee you get charged depends upon your transaction size and frequency. Depending on how you are planning to use the platform, for holding the assets long term or carrying out frequent trades, you should accordingly choose an exchange. If you are mostly into stocks and only the popular cryptocurrencies like Bitcoin and Ether, you can opt for a stock broker like Robinhood, commission-free.
6. Currency Pairs
Availability of currency pairs is an often underestimated aspect of choosing a crypto exchange. To put things into perspective, Coinbase, one of the most popular crypto exchanges in the world, allows only about 420 pairs despite offering around 10,000 assets. If you do frequency trades between cryptocurrencies, you need to choose the one that supports your needs.
7. Regulation
In contrast to traditional financial institutions, crypto exchanges are loosely regulated. Since the technology is still new, proper guidelines are yet to be formulated. Your best bet is choosing an exchange that has the best security controls and independent financial audits in place.
8. Insurance
Several exchanges are now insured against commercial crimes, including cyberattacks. For example, Gemini maintains $290 million in digital assets insurance alone. Equally important is the Federal Deposit Insurance Corp. (FDIC) protection for your cash dollars with the exchanges as you move money out of the digital assets. This will provide insurance for up to a quarter of a million dollars.
9. Tax Compliance
Remember that your crypto asset trading profits are taxed just like any other profits. Not all crypto exchanges, particularly the ones based in foreign countries are known for sending the necessary form for your tax filings on time. For the same reason, you are encouraged to choose a crypto exchange with a robust customer support service.
