Choosing an exchange is one of the hardest tasks for a beginner. This article helps you to pick the right one for you.
The success of your cryptocurrency investment is based on several factors. Obviously the future value of the currency itself cannot be predicted or influenced by a normal user. The good news is, you can influence some other factors and it is up to you to make the best possible decisions. Choosing the right exchange is one of them.
Even if you are not planning to invest big sums or you want to follow our recommendations, you should read this guide. You do not want to lose your funds because of predictable reasons, do you?
Allways be cautious
You should always be cautious when you entrust someone with your money. There are scams and frauds out there, ready and waiting for people who are carelessly investing their funds. Don’t forget that one of the earliest digital currency exchanges and one of the most popular, Mt. Gox, collapsed while others were hacked or comprised in other ways.
One of the best signs that an exchange is a legitimate service is whether or not a physical address is mentioned in the impressum. If you cannot find a physical address, you should not use the exchange and this is for several reasons.
First, transparency is often a sign of legitimacy. Second, if you do not know where the exchange is based, you will have no information about their legal status. Third, if your account gets hacked or compromised in any way, it is much easier to address these issues to the right regulators.
You should also check the reputation of an exchange. Have they experienced security issues in the past? If so, how did they deal with it? What do they say about themselves and their service? What is the opinion of users and people from the crypto community? Dig deeper than usual and look for potential negative stories the exchange would not want potential customers to see.
Features of exchanges
Security features
Even if the crypto world has existed for quite a while, for many it is still the Wild West. Part of the appeal is that while you are not completely anonymous you can still trade pseudonymically.
A side effect of pseudonymity is that security is always important when dealing with cryptocurrencies. To be safe, you should consider the very same issues choosing an exchange as choosing a wallet.
Key storage
Like wallets, storing your keys on a cold client-side device is the safest way to secure funds. The problem is for exchanges storing all funds is not practical. It takes significantly longer to process transactions.
However, a good exchange will pool all user funds from the entire platform and remove big parts of it to a cold storage. Consequently, if the platform is hacked, the majority of funds are safe.
If you do not want to take that risk or have a large number of funds, removing your key from the exchange and keeping it in your wallet is the best idea.
Insurance
Since cryptocurrencies are still relatively new, in most cases you are your own insurance. Nevertheless, with the industry expanding, some service providers now offer various forms of insurance. Some government regulated exchanges even store customer funds with registered banks. This enables them to extend government backed deposit insurance to their user’s fiat accounts.
Functionality features
Regardless of your trading experience, the first thing you need to consider is that you cannot trade every cryptocurrency on every exchange. The best known cryptocurrencies like Bitcoin, Litcoin or Ethereum are traded nearly everywhere. If you are looking for a more exotic currency, you will first need to check which exchange you will need to use.
Also, keep in mind that not every service will accept your fiat currency or geographical area. For example, some US customers cannot trade on most of the large exchanges if they are from certain states.
Fees
There are nearly as many fee structures as platforms. Which fee model is used, depends on the particular type of user the service is made for. As a daily trader, you do not want high individual transaction fees. On the other hand, if you just want to invest a small sum as a one off, fees will be less relevant to you.
Types of exchanges
On your search, you will encounter different kinds of exchanges. In general, there are 3 different types. Each of them fits different demands, so you should think about how you are planning to use it.
Brokerage
Beginners most often choose brokerage platforms. These allow users to buy and sell directly from the provider of the service. So completing a transaction is easy and fast. With these you will most likely be expected to verify your account by providing personal information like a photo of your passport.
Peer to Peer
Peer to Peer platforms, also known as P2P platforms, are preferred by those who value privacy above all else. With these services, you can trade one-on-one whereby the two traders decide upon the price and payment method autonomously. Some of them are location based and just help you find a place to meet other traders in the real world.
Most P2P platforms will go further offering to secure the trade. They act as an escrow and arbitrator in the case of disputes.
Full trading platform
These platforms are comparable to real stock markets. They put a large number of users together and allow them to exchange among themselves. In order to do that full trading exchanges utilize an order book to match buy and sell orders.
If you want to go deeper into trading, the big platforms even provide features such as special order types, margin trading, customizable graphs and much more. Nevertheless for the beginner user, these features are unnecessary.