Cryptocurrency exchanges represent a fundamental component in the wider community, allowing anyone access to cryptocurrencies round-the-clock. The 24/7 nature of the cryptocurrency market could perhaps be a unique proposition, given that even the likes of the stock market and the foreign exchange (forex) market are only open during standard working hours.
There are three ways for the public to access the vast amount of coins and tokens available:
A process where individuals participate in validating transactions in the blockchain, requiring the necessary bandwidth to store the entire blockchain and computing hardware which requires initial costs. In return for miners’ work in validating transactions and securing the blockchain, they are rewarded with new, minted coins.
2. Initial Coin Offerings (ICO)
Similar to an Initial Public Offering (IPO) for stocks, ICOs represent the first issuance of coins by the project. Investors need to possess the upfront capital – usually in the form of Bitcoin (BTC) or Ethereum (ETH) – to participate in an ICO and thereafter receive ICO coins. This form of fundraising was popular in 2017/2018. Today, it is hardly used by projects due to its regulatory complication and lack of market participant interest.
3. Buying Through an Exchange
Users can simply register to a cryptocurrency exchange and begin buying and selling a wide variety of coins using their fiat currencies or cryptocurrencies.
The easiest way that an individual can own cryptocurrencies initially is buying through an exchange, since mining is a complex and technical process while investing through an ICO requires investors to own the initial coins in the form of BTC or ETH. In the pursuit of selecting a cryptocurrency exchange, there are various ways to assess whether a particular cryptocurrency exchange is credible or otherwise.
Criteria for Choosing a Reliable Cryptocurrency Exchange
As with the variety of coins and tokens available in the market, there are also numerous exchanges in the market on which you can acquire cryptocurrencies. Although it can be tough deciding which exchange is appropriate for you, here is a list of important factors that need to be looked at before you decide where to trade on.
The reputation of an exchange is the first thing to look at, since a bad reputation will prevent any potential user from exploring any other factors. Good benchmarks for the reputation of an exchange are either the absence of adverse news relating to that exchange in terms of the exchange being hacked or compromised, or the cumulative reviews given by its users. Regarding the former, it has become commonplace to hear of exchanges being hacked or losing users funds. Exchanges affected by such a thing automatically lose credibility in the eyes of the public. Regarding the latter, it is important to read reviews by experienced users of the exchange to assess whether the exchange is generally considered a good or bad platform.
Security is the core of a cryptocurrency exchange due to the common occurrence of hacks and attacks. It is therefore imperative for exchanges to implement effective security mechanisms to safeguard user funds and prevent internal systems from being breached. Common security practices include storing client funds in cold storage, leveraging on multi-signature (multisig) technology and a secure KYC process.
Liquidity refers to the ease of buying and selling in the market. A cryptocurrency exchange needs to have sufficient trading volume and a large number of market participants for users to trade coins at better price point, and have the ability to close out trades instantly. Exchanges with high liquidity facilitate more efficient price discovery, and allow traders to exit and enter with relative ease. The best method to ascertain liquidity is to look at the average daily volume for a cryptocurrency exchange as well as at their order books, which track all buy and sell orders currently placed by participants in the marketplace. On CoinGecko, we provide additional liquidity related information for traders to assess such as the orderbook depth, slippages, and bid/ask spread.
4. Trading Fees
Fees are a major element that is often overlooked by users. Particularly for short-term traders, fees can eat into their profits if they are not managed well. There are different layers of fees associated with a cryptocurrency exchange:
Trading Fees: The fees charged for every trade executed on the exchange. These fees are usually automatically deducted from the overall balance, which makes it hard to quantify the actual dollar amount since most trading occurs on crypto to crypto pairs.
Withdrawal Fees: These are fees deducted from users’ overall balance during the withdrawal process, either to an external cryptocurrency wallet (in the case of withdrawing coins) or to the user’s bank account (withdrawing fiat currency). Both carries a different set of fees.
Some exchanges such as Binance, Bitfinex, Huobi, and more that offer discounts on trading fees when paid with their exchange native tokens.
It is always wise to look at the fee structure of an exchange before deciding to trade on it.
5. Ease of Use
The user interface for a cryptocurrency exchange should be intuitive and easy-to-use, so that the user experience process is enhanced, especially for those new to the market. A good exchange ensures that their platform is easy to navigate, with all the necessary tools and functionalities simple, usable and easily accessible.
Top Seven Cryptocurrency Exchanges
In no particular order, here are some of the best cryptocurrency exchanges in the market today that did well based on the above criteria.
Binance consistently ranks as the top cryptocurrency exchange based on liquidity and trading volume on CoinGecko. In 2017, Binance was the fastest growing cryptocurrency exchange when it was first introduced. Aside from its smooth user interface, Binance offers one of the lowest trading fees in the market. Users even get a discount on trading fees if they own Binance’s native token, BNB. Binance has a wide language support covering all major languages. Binance also has a wide variety of coins and token pairs available for trading. Customer support is also top notch, with user issues solved quickly. Other than spot market trading where you can trade cryptocurrencies, you can also long or short bitcoin on Binance Futures, earn interest through Binance Savings, and trade options as well.
Coinbase is a US regulated cryptocurrency exchange and one of the most renowed global brand in the industry. With operations across 30 countries, Coinbase is perhaps the most prominent cryptocurrency exchange that accepts fiat currency, which is extremely impressive given the difficulty in securing licenses and authorization from countries. The user interface of its platform is optimized for user-friendliness, allowing beginners to easily navigate through the exchange. A unique feature of Coinbase is that it offers insurance coverage for user funds in the event of loss or theft, which is a feature that almost no other exchange offers. In collaboration with Circle inc, Coinbase issued a USD backed stablecoin called USDC which is highly popular among DeFi services.
Probably the youngest exchange on the list, eToroX is the brainchild of eToro, the world’s largest social trading platform. Regulated by the Gibraltar FSC, eToroX offers a wide range of cryptocurrency trading pairs as well as a suite of tokenized fiat currencies for users to attain greater diversification. A unique proposition of eToroX is that the user interface is customizable, plus you can lock any profits you make in a wide variety of available currency and commodity based stablecoins, including GBPX, EURX, AUSDX, RUBX, or even gold and silver. Regarding security, eToroX has a team of top security experts, as well as leveraging such industry best practices as multisig and cold wallets. Liquidity on eToroX is very good, and constantly growing.
One of the largest fiat-accepting cryptocurrency exchange globally, Kraken is prominent exchange that accepts a wide variety of fiat currencies such as USD, CAD, GBP and Yen. Kraken is know for its robust security measures such as utilizing on cold wallets and proprietary authorization. Another facet that Kraken excels is the comparative low fees that it offers for users on the platform. Kraken also offers futures market where you can trade with leverage of up to 50x.
Bitstamp is probably one of the oldest and longest running cryptocurrency exchange founded in 2011. The exchange does not offer as many cryptocurrency pairs as compared to the other exchanges. As of this writing they offer BTC, ETH, XRP, LTC and BCH. Their long standing history provides traders with confidence and trust on the security of their funds. Bitstamp managed to survive one of the most pivotal moment in bitcoin history which is the market meltdown due to MtGox hack which saw nearly approximately 850,000 bitcoin stolen.
Created by the Winklevoss twins, Gemini is a regulated cryptocurrency exchange based in the United States where fiat deposits are stored in an FDIC-insured financial institution. Although Gemini does not offer as much diversity of cryptocurrencies as Binance or Coinbase, it differentiates itself with a robust trading system that attracts institutional traders. This is reflected by their discounts aimed towards institutional trading. Additionally, all deposits and withdrawals are free-of-charge. They have recently issued a USD-backed stablecoin called GUSD.
OKEx has constantly been in the top three exchanges in terms of cryptocurrency trading values, with over 100 coins and tokens available for trading. A unique element of OkEx is that it offers leverage trading and futures trading for users. In fact, it is one of the first cryptocurrency exchange that offers a futures trading facility for the cryptocurrency market. The exchange has their own token called OKB.
Choosing a cryptocurrency exchange can be an uphill task, especially given the wide variety of platforms to choose from. That being said, it is imperative to carefully assess the five factors mentioned above to accurately assess the credibility and strength of a cryptocurrency exchange.