When searching for an exchange, you must first know what criteria you are looking to fulfill. For example, is the goal simply to invest on a long-term basis, or choose where to trade regularly?
Investors can look to exchanges. These are platforms where people can buy and sell actual digital assets themselves. For example, spot Bitcoin is actual Bitcoin that a person can buy, sell, or transfer to any exchange or wallet at will and hold for as long as they like.
On the other hand, traders may be more interested in derivatives – trading products such as futures and options based on the price action of underlying spot assets.
These products trade contracts based on the price action of an underlying asset and can be settled in cash or a digital (physical) asset, depending on the exchange. However, these contracts belong to the exchanges that host them, which means they are not transferable to other exchanges.
After a trader has defined his or her purpose, it can be important to consider factors such as national regulations, security, and a host of other factors.
Here are 10 important points that you need to consider when choosing a cryptocurrency exchange.
Each exchange will comply with different laws and regulations, based on their geographic location, practices, and services. Some exchanges have KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, which require participating users to submit personal information about themselves during account creation.
The procedures and requirements of each exchange are also different. Some platforms require KYC and AML only when withdrawing funds or removing certain restrictions, requiring customers to provide copies of photo and team identification as proof or residential address. Some other platforms require the same verification right after creating an account.
Many cryptocurrency exchanges today also ban customers from participating in trading if they reside in certain countries, most commonly the US because the regulations are too strict.
Since cryptocurrency is still a new industry, it is important that you are aware of the credibility of each exchange you are interested in. Many exchanges have been involved in illegal activities such as hacks and exit scams, leaving users in dire straits.
You need to conduct research on different exchanges, Google them with terms like “scam”, “hack”, and then evaluate the results. Exploring exchanges on social networks can also be a useful way to see if it is reported by users, and Twitter is a popular social network in the space that you can use use.
Also, reading the terms and conditions of that platform can also help, noting anything that is alarming or out of place.
Each exchange will have its own security methods. You should check to see if the exchange offers two-factor authentication (2FA). If not, then maybe you should rethink choosing this platform, because 2FA is one of the basic and necessary elements that an exchange today must have.
Besides, let's see which type of 2FA is suitable. Google Authenticator, Authy, and Yubikey are the three most popular apps for 2FA as they are said to offer better security than mobile text-based 2FA.
Each exchange also has various measures worth considering, such as storing user assets in cold wallets and custodial services.
You can also pay attention to whether the exchange has an insurance fund or not. An exchange has funds available to compensate customers in specific cases, such as a hack.
Many other exchanges are insured under the US Federal Deposit Insurance Corporation (FDIC) – which can protect a certain amount of US users' funds.
At certain times, traders and investors may want an exchange that offers compatibility with fait, allowing them to transfer national currencies (USD, EUR, etc.) into the crypto space to use for trading and vice versa from crypto to fiat when they want to withdraw.
Each exchange will have different fiat options, compatible with specific banks, and some not. You should check with which banks the exchanges work, as well as which fiat currencies are supported.
Often derivatives exchanges will provide leverage to users. Leverage will basically allow traders to borrow a certain amount of money based on the amount of money available on the exchange to trade.
Leverage can be important for traders looking to enter short positions on a larger scale. Many exchanges allow users anywhere to use leverage ranging from 1x to 100x, although different platforms will have different rules regarding liquidation levels and margin calls.
Trading platforms vary based on the number of participants using them at any given time, as well as the amount of each asset traded. The volume factor can be very important as it affects whether you can enter or exit your position easily.
If a trader is looking to sell 100 BTC, he/she will not be able to complete on a low volume exchange because not enough sellers can survive at the current listed market price, forcing the trader Transactions must be sold to offer lower prices on the exchange.
Volume issues often complicate altcoin positions on certain exchanges, making it difficult to buy or sell large amounts of those assets.
Checking volume can sometimes be a difficult task, as exchanges create fake volumes. One method, which involves looking at order books on different exchanges, is to note how much each asset is in the order book and how far apart the price levels are.
Another way to gauge volume is to check out third-party sites that provide this type of data. Coin360, CoinMarketCap and OnChainFX are three options that list different types of volume data.
Asset prices are also different on each exchange. The price of a cryptocurrency can be traded higher or lower on two different exchanges due to the location of the user (Chinese exchanges can sometimes pump more), volume and other factors. Noting these differences can be a deciding factor in choosing an exchange, especially when altcoins are involved.
Spreads can also be a “red flag” that a given exchange may experience low liquidity/volume.
Major digital assets such as Bitcoin, Ethereum (ETH) and Litecoin (LTC) are generally available on most crypto exchanges. However, smaller coins and tokens may not be available on certain exchanges.
Therefore, it is important to know what coins the exchange supports, then choose the exchange accordingly.
Most exchanges charge a fee for each transaction on the platform. These fees will vary from exchange to exchange and are usually based on a percentage of each transaction.
Fees may not be as important to investors as traders. Traders buy and sell more often, so the fees go up, although this depends on the size of each trade relative to the size of the investment.
Some exchanges also have withdrawal fees and withdrawal limits.
Doing your own research (DYOR) is one of the most important aspects of getting into the crypto space, not just with regards to exchanges but to the industry as a whole.
The above 10 aspects can be good examples of the things that you need to consider and research when choosing a cryptocurrency exchange, although they will vary from person to person based on purpose, price, etc. treatment and activities of each person.
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