Cryptocurrencies have gained a lot of popularity in recent years. More and more people from many countries trade popular cryptocurrencies like Bitcoin, Ethereum, Litecoin, Dash, Ripple, etc. Cryptocurrency Exchanges & Trading platforms play an important part in this, and many of them have come up. Are you new to the world of cryptocurrencies? You might wonder how to choose the best cryptocurrency exchange platform. Read on, as we explain this.
Cryptocurrency exchange platforms: What they are
Why would you, a cryptocurrency user, need to use crypto exchanges? Different cryptocurrency blockchain networks use different technologies. You couldn’t use Bitcoin on the Ethereum network.
You need an intermediary, and cryptocurrency exchanges filled this gap. You can buy cryptocurrencies in exchange for fiat currencies like USD, alternatively, you can sell them. Finally, you can trade one cryptocurrency against another, e.g., Bitcoin (BTC) against Ether (ETH).
Initially, all cryptocurrency exchanges were centralized exchanges. What we mean is that one company operates and administers a cryptocurrency exchange.
Ironically, this goes directly against the principles of decentralization that are so central to blockchain! Public blockchain networks like Bitcoin and Ethereum promote decentralization. Cryptocurrency exchanges rely on centralization though.
Later, decentralized exchanges (DEXs) emerged. They are “Decentralized Apps” (DApps), and most of them are built on Ethereum. Cryptocurrency users can buy or sell cryptocurrencies using them. Since DEXs run on decentralized blockchain networks, no one controls them centrally.
Cryptocurrency exchanges: A contradiction!
Crypto exchanges help cryptocurrency users to trade using these digital currencies, which is an obvious benefit. Some exchanges offer basic trading functions. Other exchanges offer advanced trading capabilities too.
Aside from these advantages, crypto exchanges have a few disadvantages too. Consider the case of centralized exchanges. They operate like banks in the traditional world. However, they aren’t subject to the stringent regulations that govern banks. We often hear about hackers compromising cryptocurrency exchanges. However, crypto users that lose their money due to such instances of hacking can’t get any legal remedies.
Now, consider the case of DEXs. They operate on decentralized blockchain networks, which makes them more secure. However, DEXs are DApps that use smart contracts. Smart contracts are programs, and they might contain bugs. This could make DEXs vulnerable. No regulators or governments can hold anyone accountable in these decentralized apps, which exposes traders to risks.
As you see, crypto exchanges have both pros and cons. These become important considerations when you choose an exchange.
How to choose a cryptocurrency exchange
Consider the following factors when you choose a cryptocurrency exchange:
Look for a crypto exchange that upholds transparency. Ask the following questions:
• Does the exchange clearly describe its corporate structure? We find it hard to trust exchanges that don’t reveal this.
• How does the exchange deal with regulations-related questions? Does it cooperate with governments, regulators, etc. vis-à-vis regulations? Does it comply with the regulations in your country/state? We don’t recommend you choose exchanges that circumvent regulations.
• Does the exchange transparently report security breaches? Hackers increasingly use sophisticated technologies, therefore, many centralized exchanges might have vulnerabilities. Exchanges that transparently report such breaches can earn our trust. We don’t recommend you use crypto exchanges that hide or deny such breaches.
• Does the crypto exchange have insurance to protect the funds? Note that crypto exchanges that follow government regulations might be able to use government-backed deposit insurance schemes on the fiat-currency accounts of their users.
Use a crypto exchange that you can trust.
Assess the security-related track records of a crypto exchange. A good cryptocurrency exchange will provide a detailed overview of its security solution, and it will maintain transparency about it.
Look for the following:
• Does the exchange use “Multi-Factor Authentication” (MFA) for account login?
• Has it incorporated the industry-standard information security solutions like encryption, digital signature, antivirus, real-time threat analysis, etc.?
• Has the crypto exchange proactively mitigated the web/mobile application security risks?
• How does an exchange store the funds? “Cold” storage solutions are the safest, however, they are slow. Crypto exchanges should keep only a small percentage of funds in “hot” storage. They should keep the majority of funds in “cold” storage. That provides both efficiency and security.
• Does the crypto exchange engage independent auditors to review its security solutions? That provides a realistic picture of how good the security solution is.
Choose a crypto exchange that uses industry-standard security solutions and continuously reviews it.
3. Type of exchanges
Which type of exchanges do you want to use? As we mentioned, there are centralized cryptocurrency exchanges and there are DEXs.
Centralized crypto exchanges would let you buy or sell cryptocurrencies in exchange for fiat currencies. They also allow you to trade one cryptocurrency against another, e.g., Bitcoin against Ether. Such exchanges have a “Know Your Customer” (KYC) processes, and you can open an account only after providing the relevant personal information. Coinbase is a good example of such exchanges.
Decentralized crypto exchanges typically run on the Ethereum blockchain. They don’t have a central administrator. DEXs allow anonymous or pseudonymous accounts, and they don’t follow a rigorous KYC process. Governments and regulators can’t enforce regulations on DEXs since these exchanges don’t even have an administrator. “0x Protocol” is a prominent DEX.
Do you want to be on the right side of the laws when dealing with cryptocurrencies? We recommend you use reputed centralized exchanges that follow the laws. Choose a DEX if you want to trade cryptocurrencies anonymously or pseudonymously.
4. User interface and functionalities
What are your expectations when using a cryptocurrency exchange? Consider the following questions:
• Do you want an easy-to-use “User Interface” (UI)? If you are a new user, then you would probably prioritize user-friendliness. You will probably want good documentation.
• Do you want a variety of trading pairs?
• Would you need an exchange that supports a variety of fiat currencies, e.g., USD, AUD, EUR, GBP, JPY, etc.?
• Do you want an exchange that supports specific languages and geographies?
• Are you a beginner in the world of cryptocurrencies? You will likely prefer to use simple trading functionalities. On the other hand, advanced traders would probably like exchanges that offer features like margin trading, special order-types, etc.
• What kind of fees does a cryptocurrency exchange platform charge? Are you a regular trader? You will probably not prefer an exchange that charges considerable fees for individual transactions. On the other hand, this might not be a factor if you are an occasional trader.
5. Overall capabilities
Different cryptocurrency exchanges might demonstrate strengths in different areas. As a result, you might need to see how they rank in overall capabilities. Prominent market observers provide useful lists of cryptocurrency exchange platforms, and you might want to consult them.
E.g., CoinMarketCap provides an up-to-date list of crypto exchanges. It shows the parameters used for the ranking too. At the time of writing, the top 5 Cryptocurrency Exchanges & Trading platforms in this list are:
• Huobi Global;
• Coinbase Pro;
Note that these rankings might change. Study recommendations from prominent cryptocurrency market observers.
Cryptocurrencies are gaining more and more followers, and crypto exchanges play a key part in this. Various crypto exchanges operate in a competitive market. Evaluate these using yardsticks like transparency, security, type, UI, functionality, and overall capabilities. Choose a cryptocurrency trading platform that fits your requirements.
Browse our site for a wide selection of listings for crypto exchanges and blockchain technology suppliers.
*DYOR – This is for informational purposes only and is not financial advice. Do your own research.