As the adoption of Cryptocurrency is becoming more widespread with investors, interest in utility platforms such as exchanges has risen. First of all, an exchange is a digital marketplace whereby investors or traders sell or purchase cryptocurrencies.
This platform is essentially an intermediary between buyers and sellers of the coin. Exchanges are necessary because they make the process of acquiring and disposing cryptocurrency efficient. Your first step into the new world of cryptocurrencies is often through an exchange, a marketplace in which buyers and sellers interact. As a matter of fact, its role is not that different from a stock exchange.
Some of the well-known exchanges include; Bitstamp, BitFinex, CoinBase and Bittrex. To be able to trade on an exchange, an investor must sign up using their bank account, credit card or digital currency. The end result is a decentralization requiring no middlemen to complete transactions.
Just like with cryptocurrencies, there are legitimate as well as fraudulent exchanges. At the moment, they number about 190 and continue to crop up as time goes by. This leaves a user with seemingly endless options but only a few are secure and reliable.
As is stands, most exchanges operate virtually regulation free. Responsibility is limited with regards to the return of stolen, lost or hacked coin. A fresh example is Coincheck which suffered a devastating hack leading to investors losing hundreds of millions of dollars in NEM.
The importance of proper exchange selection is paramount. In that regard, let’s look at some considerations to have when picking the right exchange to trade.
Before that, there are few noteworthy points. Two quick ones:
First, cryptocurrencies are generally volatile. The nugget of wisdom for this is that never invest more than you can afford to lose. Even for the most ardent believers in cryptocurrency, the way to go is to take up only as much risk as is sensible. The price of Bitcoin as an example has halved in value in the past two months.
Second, the US Internal Revenue Service classify these currencies as property. This means that individual transactions have to be recorded and in the end taxed at your capital gains rate.
The following are some of the parameters and measures a user should take before picking an exchange:
1. Exchange’s Location
Ordinarily, a legitimate exchange has an address for the company. The absence of this should be a cause for alarm. Knowing where the exchange is located is vital. This is because legal claims can be made in the jurisdiction of the address in case of loss of digital assets.
2. Exchange Policy and Guidelines
This is important because you have to know if the exchange is suit your needs. For instance, some cryptocurrency exchanges don’t accept USD. This means that you will have to find an exchange that takes cash if you don’t have any digital tokens. To put it simply, the exchange has to work for you.
To illustrate better, a prominent exchange, BitFinex, rejects United States payments for among other reasons challenging regulations.
The policies might also go further to state’s policies on exchanges. New York, for example, has Bitlicense that mandates cryptocurrency companies to meet certain regulatory standards. The US Securities and Exchange Commission (SEC) warns investors to be diligent in ensuring that these exchanges’ meet SEC standards.
3. Reputation and Community Trust
Reputation can be inferred from ratings. A simple ratings Google search can reveal what the general community thinks of the exchange. Additionally, asking questions to investors who have experienced an exchange is important. After all, it never harms to get first-hand information.
4. What Online Forums Says
Forums such as Reddit and BitcoinTalk can provide valuable information as to the merits of an exchange. The pool of tech savvy people with different levels of expertise is a goldmine. In short, these are the best places to get educated on cryptocurrency exchanges.
5. Security Measures Put In Place
One way to achieve this is to look for an exchange that keeps the majority of its assets offline. The one example that illustrates this well is CoinBase. CoinBase is secure. It keeps approximately 98 percent of its customers’ funds offline in cold wallets.
Bitcoin prices vary from exchange to exchange. This is because cost is relative to security in place. Most notably, very secure exchanges like CoinBase charge up to 4% for all transactions. An investor should therefore play his/her cards well. Security of funds is always a priority.
In summary, the process of picking the right exchange is multifaceted but inevitable. However, one should always remember that regardless of how secure an exchange, don’t keep too much money on it for too long. Cold wallets are a great secondary tool to manage your assets. A prudent investor can always find the right balance.