Crypto Exchanges Guide: History, Considerations, and Recommendations
What is a Cryptocurrency Exchange
Fundamentally, a cryptocurrency exchange can be defined as a digital platform where consumers can exchange digital assets and cryptocurrencies into other digital assets and cryptocurrencies. However, it is functionally distinct from crypto wallets, where users store private keys to their digital assets. There are a few crypto exchanges that allow for trading into fiat currencies, but they charge higher fees and have limited trading functions.
One way to think about the difference between crypto exchanges and crypto wallets is to think about the difference between fiat currency exchanges and investment accounts. If a consumer wanted to exchange US Dollars into Euros, they would need to take their Euros to a physical terminal – usually at airports and other ports of entry – and make the trade. The trade is instant, and there is usually a small ‘transaction’ fee, depending on which vendor is used for this conversion. Similarly, when digital assets are purchased or sold, there is a ‘gas fee’ which crypto wallets charge for the transaction.
Compare this to when a consumer wants to buy stock in Apple or any other publicly traded company. In this situation, a consumer has to create a special account with a trading brokerage, connect a bank account and transfer fiat currency to the new brokerage account, and then place the trade for the stock. Most of the time, this trade is not instant, and requires some processing time. This is the same with trading cryptocurrencies, as there is a conversion time between trades.
What is the Purpose of a Cryptocurrency Exchange
The crypto and blockchain economy does not function off of just Bitcoin and Ethereum – although much of it does. There are hundreds of crypto companies which function off of a relatively new concept in the world of crypto, something called altcoins and tokens. For those that want to invest in altcoins and tokens, crypto exchanges function as gatekeepers to this side of the crypto world, allowing traders to buy and sell different cryptocurrencies and tokens.
The aforementioned process is for acquiring existing cryptocurrencies and tokens already in existence. For new coins and tokens entering the crypto market, there are three primary methods.
An ICO, or Initial Coin Offering, is the process for introducing new coins into the marketplace. Similar to a classic IPO in the traditional economy, consumers wishing to gain first access to the new coins exchange crypto (e.g. BTC, ETH, LTC, or whatever is permitted) for the new coin issued, and the company uses this opportunity as a fundraising scheme. Another related term to IEO is TGE, which stands for Token Generation Event, and covers the creation of tokens, either utility or security tokens. However, this method has lessened in popularity during 2018 due to regulatory uncertainty and an over-saturation of fake projects. This collapse in ICO popularity paved the way for the IEO, or Initial Exchange Offering.
IEOs have gained in popularity over the last two years as crypto exchanges have increased in popularity and security. In this method of fundraising, crypto companies partner with an exchange to list their coin, or token, directly onto an exchange for sale. Therefore, the crypto exchange is primarily responsible for the IEO, and takes on obligation (and burden) to sort out if a coin or token is legitimate. This assessment of the risk and viability of a project gives exchanges an opportunity to further improve the reputation of their exchange, by essentially being the referees of the crypto markets these days.
Things to Consider Before Registering with an Exchange
Not all cryptocurrency exchanges are built the same, as already discussed. When looking to register with a cryptocurrency exchange, users should consider the following: geographic restrictions, verification requirements, fees, global reputation, and form of payment.
Not all countries globally allow for their citizens to participate in the crypto economy. Many outright ban the sale and purchase of crypto, while others have restrictions, or regulate it differently than you might presume. Once you have determined the legality of crypto trading, you should then review a crypto exchanges’ verification requirements, often referred to as KYC (Know Your Customer). Some exchanges allow you to remain anonymous, but many of them require some form of ID verification to prove your identity. While KYC processes can take up to a few days, this is a good indicator of a secure and legitimate exchange, as it allows the exchange to scrutinize users against hackers and scams that historically plagued exchanges before KYC methods were implemented.
Transaction fees differ greatly amongst exchanges, and should be a top priority when determining which exchange to use. There are three primary types of fees exchanges employ – deposit, transaction, and withdrawal. It is important to know these before performing any activity on an exchange. Additionally, payment methods are an indicator of the strength of an exchange; the more the better. Different payment methods include direct bank transfers, wire transfers, money orders, debit and credit cards, and digital payment services like paypal or even venmo. Users who are trying to choose a crypto exchange should also review and understand the terms for using different payment methods, as credit cards and PayPal will come with higher conversion fees, as there is an inherent chargeback associated with these payment forms.
What are Some of the Top Crypto Exchanges
Liquid, is one of the newer crypto exchanges in the market after a merger of two crypto exchanges in 2018. Liquid quickly gained in popularity due to a very user-friendly design that is easy to figure out, and is regulated by the Japanese Financial Services Agency. It also offers a versatile range of trading pairs, including fiat to crypto. The native token for Liquid, QASH, gives traders access to different unique features including lower trading fees and the ability to earn interest through their lending app. The exchange also features live currency conversion, and has the highest trading volume for the Japanese Yen in the world.
IDEX is unique because it is a decentralized platform that exclusively trades different Ethereum (ERC-20) tokens. This is its biggest pro, but also its biggest con. If users have ERC-20 tokens which to trade, and users want to attain other ERC-20 tokens, then IDEX is ideal for this type of trade. However, there is no transaction with fiat currencies and has low liquidity. IDEX is also known for its highly rated response time and speed of doing business, which has been compared with the speed of more popular centralized exchanges.
Huobi is a crypto exchange that is very popular in China, as deposits are free if they are made in Chinese Yuan. Unlike other exchanges, Huobi does not require ID verification, and is considered one of the least regulated exchanges. However, it does maintain high liquidity compared to many exchanges, and has 24/7 customer support. One of the limiting factors to Huobi is the persistent accusations it has faced surrounding wash trading, or fake volume. The exchange is also limited in its UX, as it only offers translation from Chinese into English, and even then there are limitations to the English.
Kraken is the recommended crypto exchange for advanced crypto traders. Kraken is considered to be the oldest and largest cryptocurrency exchange still operating, with the highest liquidity and euro volume in the market. Kraken also maintains 24/7 support for customers, and has a lower fee structure than other top crypto exchanges. Users can also trade between cryptocurrencies and fiat currencies, and a wide variety of altcoins and other digital assets. Advanced traders can access margin and OTC trading. Unlike many crypto exchanges, Kraken is a fully auditable and transparent reserve.
Bittrex is an American crypto exchange based in Seattle that has a reputation for being a highly secure crypto exchange. One reason Bittrex users give the exchange such high remarks is the +250 altcoins that are tradeable on the platform, which is one of the highest in the industry. Its ux is also considered to be one of the best for beginners who want to get started in crypto. The downsides of Bittrex revolve around their customer support. Accounts are frozen more often than their competitors, and users have complained of slow response time from Bittrex customer support.
Binance is a relatively new crypto exchange, but it has quickly gained in popularity due to the wide variety of trading pairs available on the platform. The exchange is also one of the only ones to feature its own coin called BNB, which is ubiquitous in the crypto world these days. This is good for traders, because it means if BNB is utilized for trades, Binance offers the lowest trading fee in the market. There is also an affiliate program that rewards users for referrals, which isn’t a standard feature for many exchanges. Binance features a 2FA for login, and has never been hacked, but it hasn’t been around as long as the other major cryptocurrency exchanges. This exchange also features different dashboards based on your comfort zone with crypto trading.
The Bottom Line
The selection of a cryptocurrency exchange depends entirely on the use of the trader.
For beginners, the decision should primarily rest with ux and security, but for advanced traders, the availability of different trading pairs and features will be important. This is why it is important to thoroughly research an exchange prior to selecting it. The final exchange choice should also have compatibility with your crypto wallet. There are more than a hundred different cryptocurrency exchanges available globally, so the selection of one needs to be serious, and research must be done on user interface, geographic location, advanced trading features, fee schedule, KYC, and payment options available.
While there are many wallets out there that currently fit the needs of crypto users, there is a new wallet to be released in the very near future that will prove highly valuable and versatile for any level of trader. Stay connected with us to hear about the release of this upcoming wallet.
Disclaimer: The information provided in this post is not legal, accounting, or financial advice. I am not a lawyer, accountant, or financial advisor. I am not registered as an investment adviser with any federal or state regulatory agency. The Information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.
Title photo by klss, Shutterstock.