Cryptocurrency exchange

How to choose a cryptocurrency exchange for trading digital assets

You decided to trade cryptocurrencies, but don’t know where to start? There are many crypto exchanges (actually hundreds) out there and it may not be such a straight forward task to choose one that suits your needs.

I compiled a list of five things you should consider before opening an account with cryptocurrency exchange. See below:

1. Decide what exactly you want to trade

There are many cryptocurrencies in circulation, some are more established (think Bitcoin and Ethereum) and some are alternatives (Binance coin – BNB, Litecoin and others). As with traditional financial instruments you can trade spot market or derivatives, and some exchanges (like Coinbase) are trading only spot, while others (like Binance) specialize on a wider range of coins and their derivatives. Note that links in this post are affiliate links, please see affiliate disclosure at the bottom of the page for more details.

To sum it up, if you want to trade, you need to decide if you want to trade following:

  • Spot established cryptocurrencies or altcoins (then Coinbase may be a good choice)
  • Futures, swaps or options (for these you may try Binance or Deribit for options trading)
  • You may want to invest in cloud mining or staking to make passive income with your cryptocurrency, then Binance is a good choice
  • In any case you need to check  particular exchange or cryptocurrency legal status in your country, its reputation and fee structure

You can read more detailed comparison of top crypto exchanges here

2. Choose type of exchange you want to use for trading

Cryptocurrency exchange - trading

At the moment majority of crypto exchanges are centralized, which means that there is a central entity (exchange) that facilitates trading in crypto currencies between the participants. Generally speaking, this is against the idea of crypto economics, which promotes decentralization for financial transactions, but it was easier to organize in the early years of crypto trading.

Then, there are purely decentralized exchanges, where transactions are managed via blockchain. Uniswap and Tokenlon are most popular decentralized exchange at the moment, but there are many others.

From trading perspective, key difference between the two exchange types is that centralized exchanges support both fiat (like USD, Euro and any other major currency) and crypto currencies, while decentralized exchanges operate only with cryptocurrencies that are native to blockchain (so you can’t use USD or EUR for trading, as these currencies don’t have public/private keys to put them on a blockchain).

It’s also worth noting that decentralized exchanges don’t hold any of your digital assets – you connect your wallet to transact with their blockchain and you are responsible for your cryptocurrency security. With centralized exchanges you have a risk of losing money if centralized exchange is hacked.

To sum it up, centralized exchanges are most common now. They allow you to buy and sell cryptocurrencies with fiat money, but you will fully rely on the exchange when it comes to your fiat and crypto balances. On another hand decentralized exchanges don’t have access to your balances, but you can’t easily sell your crypto assets for fiat currencies (like USD)  – you’ll need to use peer-to-peer marketplace or centralized crypto exchange for this.

3. Learn about security and protection offered by your cryptocurrency exchange

Cryptocurrency security

Since cryptocurrencies are not regulated and don’t have same legal protection as traditional financial institutions it’s very important to understand security provided by the exchange.

For centralized exchanges it’s worth checking following:

  • Where the exchange is registered as a legal entity, where is it headquartered?
  • Is it regulated as a payment institution? As a financial services company? Who is the regulator?
  • Are your fiat balances (balances in USD or another country currency) protected by any deposit protection scheme?
  • Are your digital assets managed by the exchange insured?
  • What method of protection exchange is using – e.g. are crypto assets stored on the cold storage or there are other measures to protect these assets?
  • Is exchange performing crypto asset audit? Are they publishing their findings? How frequently is it performed?
  • Has it been hacked before? How much cryptocurrency was stolen and was it reimbursed to exchange users? How company responded?
  • How reputable a cryptocurrency exchange is? How long is it trading?
  • What additional level of security is provided – e.g. 2-factor authentication etc.

As decentralized cryptocurrency exchanges are relatively new it’s hard to say what can be a potential security issue here. Overall decentralized exchanges should not have direct access to your wallet and all the transactions are managed on a blockchain, so it’s important to understand how reliable / secure that blockchain is. From this perspective it’s better to use crypto exchanges with a wide user community that will help in identifying and fixing any issue.

4. Understand fees and transfer limits

As with any traditional exchange it’s important to understand transaction fees and fee structure. Fees can be specific to each cryptocurrency pair, so it’s worth researching fees specifically for instruments or pairs you want to trade.

Another important item is funding / withdrawal limits and fees for transferring or withdrawing funds. These fees, limits and speed of transfer are worth noting before signing up with any exchange. This item is relevant to centralized exchanges, as with decentralized services you are managing your wallet balances yourself.

5. Research cryptocurrency exchange reputation and legal aspects

Cryptocurrency exchange legal aspects

Last, but not least is regulatory and legal status of your chosen exchange in your country. You need to check if exchange is allowed to provide services in your country and if it’s legal to trade cryptocurrencies in your country at all. There can be different tax implications, so it’s worth speaking with a professional lawyer and accountant specializing in this field in your country.

On another hand it’s also important to assess reputation of your selected exchange – were there any issues with it in the past, is the platform secure, what other users think about it? Do you know anybody who used their services before?

Remember, cryptocurrencies are new type of assets and legal and regulatory aspects are not fully ready yet, so it’s your responsibility to assess all the risks before engaging in any crypto trading or investment activities. Seek professional advice before making any investment decisions.