Cryptocurrency Exchanges: How to Choose, What to Look At, and What to Fear
When it comes to investing in cryptocurrency, two questions arise first. Do we trust the currency we are going to invest in, and do we trust the exchange and wallet we are going to use?
The secret of successful traders is that their trust is always well-founded and built on experience and market knowledge. But beginners have no experience, and most are just starting to study the market.
Of course, trading on the exchange is convenient, since you have access to your funds 24/7 and can quickly make transactions if you have the Internet. But there are also disadvantages: lengthy identity verification procedures, commissions, and, of course, hacker attacks. Therefore, before you start trading on a crypto exchange, you need to consider several main factors.
Commissions and liquidity
As a rule, the higher the trading volume of the crypto exchange, the lower the commission costs. The larger and more respectable the trading floor, the more the exchange tries to win by reducing the commission.
• Compare all commission expenses. Some cryptocurrency exchanges charge commissions for depositing funds and for each trade;
• Check withdrawal fees. It is known that some cryptocurrency exchanges have unreasonably high fees for withdrawing funds from certain altcoins, but in general, the withdrawal fee is almost the same everywhere and amounts to 0.0005 BTC.
However, do not forget that the commission is far from the main thing when choosing a cryptocurrency exchange. The second main point is the level of liquidity. Liquidity is an indicator that allows you to understand how actively trades are held and how many traders are interested in maintaining the turnover of the cryptocurrency. It is thanks to liquidity that traders get the opportunity to create trading strategies on the cryptocurrency exchange.
• The most liquid crypto exchange has the highest trading volume. Liquidity makes trading much faster and easier;
• Please note that trading liquidity varies by geographic location and jurisdiction. On some cryptocurrency exchanges, for example, high liquidity can be observed only in BTC / EUR, and for BTC / RUB there will be a low trading volume, and vice versa.
Location
Given that cryptocurrency trading regulations vary from country to country, it is very important to check where the cryptocurrency exchange you choose to trade is located on.
Since most exchanges cannot serve every country in the world, make sure the exchange you choose allows you to trade legally.
As a rule, cryptocurrency exchanges prohibit traders from Cuba, Iran, North Korea, Sudan, or Syria from trading on their platform. However, there are sites on which the list of sanctioned countries is more expanded since the exchange falls under the requirements of US sanctions control.
• If you are determined to adhere to the legal aspects as much as possible, then you should choose a cryptocurrency exchange from your own country;
• A crypto exchange, which is subject to the laws of your country, will greatly simplify legal solutions to any issues. Of course, you can use crypto-exchanges from other countries, but you should understand that such exchanges are also not fully responsible;
• Cryptocurrency exchanges in the same legal framework as you may even insure your funds. This means that in the event of a loss of your funds, the exchange can compensate for the damage, although not all comply with such guarantees.
Here, however, it is worth noting that if the exchange is subject to the regulations of a particular country, it is highly likely to be significantly inferior in terms of the number of assets in the listing due to the ambiguous legal status of some virtual currencies.
It is important to understand that when choosing a cryptocurrency exchange, you will have to balance between legal transparency and the availability of cryptocurrency assets.
Safety and usability
Security is obviously the most important factor when choosing a cryptocurrency exchange. If an exchange has had precedents of being hacked in the past, there is a further threat of loss of funds in the future, even though the advantages that the exchange may offer over other sites.
Nobody wants to lose their money, so in that regard, consider the following:
• The exchange data transfer protocol must start with HTTPS. Avoid HTTP connections as this protocol has long been outdated;
• Availability of two-factor authentication function;
• Ideally, your funds on the exchange should be kept in “cold storage”, but you are unlikely to be able to verify this;
• Public press releases on auditing programs.
Remember that you need to feel secure when trading on the exchange. Find out in advance what security measures the exchange has.
• The cryptocurrency exchange does not hide its owners, CEO, and team members. Ideally, the real address of the headquarters should be indicated on the website of the cryptocurrency exchange;
• Some exchanges, in the pursuit of transparency, even publish their cold wallet storage addresses, but this is rather an exception to the rule.
One of the easiest ways to check a cryptocurrency exchange for a scam is to read reviews on Reddit threads or Bitcointalk. True, here it is worth noting that some dishonest exchanges do not hesitate to use bot farms and massively wind up positive comments.
Be sure to read reviews on the network — what its users write about the exchange. Find a chat where they communicate, find out what problems they are talking about. Find a chat where the exchange communicates with customers — see how quickly it responds to their requests.
It is also important to distinguish that there are both cryptocurrency exchanges aimed solely at trading with cryptocurrencies, and those that offer trading in pairs with traditional currencies like the dollar, euro, ruble, pounds, yen, etc.
Keep in mind that exchanges offering to trade with fiat will, a priori, request from users many times more documents to verify their identity than exchanges focused on trading exclusively with cryptocurrencies.
When choosing an exchange, remember that your criteria may change in the long run. For example, you might want to have an exchange on hand that supports a wide range of altcoins, specific fiat trading pairs, and additional features such as margin trading or OTC OTC trades.
At the end of the day, remember that no exchange can ever guarantee 100% protection of your funds. Never keep your funds on the exchange longer than necessary. Always keep only the amount of funds required for trading.
Most cryptocurrency exchanges have been and will be a tidbit for potential attackers.
Since exchanges are forced to store large amounts of virtual funds in one place to ensure a fast turnover of cryptocurrency assets, attackers will always create more and more sophisticated schemes to steal funds.
Most of the users’ money is kept in cold offline wallets. Operational money for different transactions — in hot online wallets. These hot wallets are of interest to hackers.
Hacking young exchanges is technically not very difficult — most often their security systems are developed on technologies with which cybercriminals are likely to have already dealt. Let’s note right away that we are talking about unregulated sites.
Experts name several main approaches to hacking the exchange. For example, hacking the accounts of employees or founders, using malware.
Web applications that act as a bridge between clients and their assets on exchange servers can be hacked. Hot wallets are at a huge risk.
According to a Group-IB study, on average, one ICO project accounts for at least 100 attacks. The statistics on the hacking of large crypto exchanges are less, but the stolen amounts are much more significant.
Of course, there is no exchange without technical difficulties — but if there are many of them, then this is an alarming signal. Its vulnerability should not be ruled out. You might think that cryptocurrency exchanges are becoming safer because technology is not standing still. But the reality is that the number of crypto attacks is growing.
In recent years there were 12 major hacks on crypto exchanges — a record annual number for the entire existence of the crypto industry. Of these, 11 cases are related to the theft of cryptocurrency ($ 292,665,886), and one — with stolen user data (510,000 logins).
Always keep the rest of your funds exclusively in your personal wallets, having private keys at hand.
There are some important aspects of cryptocurrency trading that are best understood before investing in it. Risks were, are and will be present. If you follow at least some of the rules, then they can be reduced.
• There is always the possibility that the market will crash or you will face some other disaster. Cryptocurrencies are decentralized and not regulated. And there is nothing you can do about it.
• There is also no unambiguous answer to the question “Is it legal to trade cryptocurrency”. It all depends on the country. In Germany, bitcoin is recognized as a currency of account, in Japan — as a means of payment. In China, only individuals can legally trade it. All cryptocurrencies are legalized in Belarus.
In one form or another, cryptocurrencies are also legalized in the USA, Canada, South Korea, Great Britain, Denmark, Finland, the Netherlands, Sweden, Estonia, Australia.
Conclusion
Let us briefly recall the main steps that will require trading cryptocurrency on the exchange:
• Choose a crypto and analyze the market — what experts predict, how the coin behaved, what growth prospects, etc.
• Study the possible risks and be prepared for them.
• Choose a crypto exchange — we advise you to consider regulated platforms. Study its story.
• Decide how you will store your money — on the exchange or in your wallet.
• If in a wallet — decide which one.
• Choose a trading strategy — it will be a long investment or speculative trading on short positions.
• Study trading tools — they help determine the trends and behavior of the cryptocurrency.
• Do not invest on sites with a controversial reputation. Choose trusted resources that are open about what security measures they are taking.
• Check the functionality of your chosen exchange and whether you have the opportunity to register on it. Learn how to deposit and withdraw money and how convenient it is for you.
• Look at the liquidity of the site, what trading pairs and trading instruments are available, whether there is margin trading (leverage).
The first steps in the world of investment can be painful. But if you study in advance the typical mistakes of novice traders, you can avoid many problems.
