The Essential Checks to Make When Choosing a Crypto Exchange
- Users should take time to thoroughly research the exchange they’re considering.
- Exchanges should not be in the business of adding any and all new coins as this presents costly risks to users, says the CEO of deVere Group.
- Users ought to opt for exchanges with higher trading volumes as liquidity is crucial.
According to the CEO of deVere Group, Nigel Green “crypto is inevitably the future of money. But you need to get it right from the get-go”. This certainly rings true, especially as many investors are still reeling from losses during May’s crypto market crash.
There are currently over 20,000 tokens in existence, with global crypto adoption rising by over 880% last year. In fact, TripleA estimates that there are now over 320 million crypto users worldwide. In light of such exponential growth, it is more imperative than ever for investors to evaluate where and how to transact in cryptocurrencies. That means choosing the right crypto exchange, as well as deciding how you will use the platform.
Green, who runs one of the world’s largest independent financial advisory, asset management and fintech organisations, states:
“The issues facing some of the biggest crypto exchanges right now highlight why you should spend some time on choosing the right one. Don’t necessarily just jump on the ones with the flashiest TV ads and celebrity ambassadors. Security, liquidity, fees, history and user experience are essential checks you should make”.
The CEO is referring to the recent string of freezes enacted by several cryptocurrency exchanges that stemmed from Terra’s collapse and the loss of nearly $40 billion in investors’ capital. More specifically, the crypto market crashed in May when the algorithmic stablecoin UST lost its peg to the U.S. dollar and the price of LUNA dropped 98%. The result was a market capitalisation that fell below $1 trillion for the first time since January 2021.
In response, crypto exchanges like CoinFLEX, Zipmex and Vauld halted withdrawals and deposits. However, CoinFLEX later allowed users to withdraw up to 10% of their funds and Zipmex has resumed withdrawals for some altcoins, while Bitcoin (BTC) and Ethereum (ETH) remain frozen.
Green added: “You should see which company owns the exchange. Is it well-established? Is it a global company that can handle complicated issues across multiple jurisdictions? Is it experienced in both fintech and traditional financial services? Is there a proper client service department to deal with any issues quickly and effectively? Are there news and educational resources on offer?”.
Coin Offering List
Considering that there are tens of thousands of cryptocurrencies in existence, it’s important to recognise that not all exchanges offer every digital asset. Users ought to think about what coins they are most interested in and whether the exchange has a suitable menu.
For instance, a well-known exchange like Coinbase offers more than 526 crypto-to-crypto trading pairs, while Kraken lets you trade more than 160 coins. When examining a platform’s coin offering list, Green said:
“Most exchanges add to their coin offering list on a regular basis as each one has a different set of characteristics. But the exchange should not be in the business of adding any and all new cryptos as clearly this presents obvious, avoidable and potentially costly risks to users”.
As such, he encourages platforms to conduct due diligence before any new coin is listed, adding that users “should ensure this is part of the exchange’s policy”. Notably, there are exchanges, often based overseas, that allow users to trade less mainstream coins that struggle to get listed. However, not all exchanges are subject to same level of regulation.
When it comes to cryptocurrency exchanges, reputation counts and users ought to take time to thoroughly research the platform they’re considering. What do other users say about the exchange? Have there been any security concerns in the past? If so, how did the exchange address such issues?.
“Most crypto exchanges offer basic protections like two-factor authentication, others will need official identification such as a passport or driver’s licence to open a new account. Some also have authentication codes required when you buy or sell, or if you make major account changes” explains the deVere CEO.
In December 2021, hackers stole around $196 million worth of tokens from BitMart during a large-scale security breach. Instances like this signal the importance of choosing a crypto exchange with strong measures in place against such cyberattacks, or a user can be on the lookout for additional features such as Crypto.com’s exchange mobile app which supports biometric login and uses facial and fingerprint identification to verify identity.
Nonetheless, major exchanges like Kraken and Gemini typically require users to provide government-issued identification when opening a new account in order to further enhance security and ward off illicit actors.
The Bigger Picture
Another equally vital practice is to compare fees as you may have combed through the leading exchange offerings and reams of data to determine the top service only to forgo how the exchange will impact your investing daily.
An exchange can have an excellent reputation and no history of hacks or scams, but you’ll find that it charges high fees for depositing fiat currency and low transaction fees between coins. Thus its imperative to compare different fee structures that are all targeted to a particular type of investor.
For example, if you are a day trader who doesn’t want to incur high individual transaction fees or if you just want to buy a small amount of crypto, fees will be less relevant than other features aimed at frequent traders. Fee tiers are usually based on your total trading volume over a 30-day period and the percentage you pay generally lowers as the size of your trades increase.
Consider how the fees would impact your investing based on your style; do you plan to be highly active, executing transactions every day? If so, it may be best to opt for an exchange with lower transaction fees. Green concluded: “Liquidity is important. You’ll want to know that you can exchange your traditional currencies into crypto and vice versa with no hassle. A good way to look at this is by trading volumes – the higher the better”.
Overall, in the words of the deVere CEO, the process of choosing the right crypto exchange may be rigorous and it “might take time, but your future self will thank you for it”.