If you are looking into purchasing or trading Bitcoin, you will probably need an exchange to get you started. Even if you just want to trade cryptocurrencies against each other, without an exchange that would serve as a bridge between fiat and crypto, that is almost an impossible task.
Picking the right exchange can be tough as some are better than others. There are some distinct differences that set most cryptocurrency exchanges apart. some will have better security features but while others will be able to provide more liquidity and purchasing options.
The best practice is to determine whether an exchange is safe or not and this can be done by looking into their track record and reputation history. Once that is sorted out, everything else should seem a lot easier. In general, these are the things you should be looking into:
- Does the exchange provide advanced security features?
- Do they hold customer funds online or offline?
- How good is their customer support?
- Do they offer currencies and tokens you are looking to buy?
- Are they regulated and in what way?
- What payment methods are available?
- Are there any fees or limits that should be taken into consideration?
Are all cryptocurrency exchanges the same?
You should know that almost all cryptocurrency exchanges have their similarities and differences. Some of them only operate as brokerage services while others may allow trading, lending, or some other services. Depending on the country they operate in, they may have more freedom to add new coins constantly or have a low number of cryptos to offer due to regulatory compliance.
How to convert cash into cryptocurrency?
Users can either convert cash to crypto via a brokerage or find an exchange that offers fiat deposits. There are quite a few out there that allow USD or EUR deposits. Once the money is deposited into your account, you can trade it for any cryptocurrency that is paired with the fiat of your choice. Most exchanges will have a how-to guide for complete beginners.
Knowing the difference between exchange types
Cryptocurrency exchanges are categorized into three main groups – Brokers, Peer-to-Peer platforms, and trading platforms.
Websites that simplify fiat to crypto conversions almost always belong to brokers. Their services allow users to purchase cryptocurrency with their credit cards, wire transfers, or some other form of bank payment. Brokers are known for their beginner-friendly approach when it comes to buying and selling cryptocurrency.
P2P (Peer-to-peer) trading platforms
P2P trending isn’t the most popular method out there but for some, it may be the only option. What these platforms do is connect buyers with sellers so they interact directly. The main difference is that there is no intermediary between the trading parties so in some cases it may prove to be a very insecure way to trade crypto. Prominent examples of P2P platforms would be LocalBitcoins and Paxful but some exchanges like Binance also offer these services.
Trading platforms, in a way, combine all of the above. Instead of connecting users directly, they allow them to trade with each other in an anonymous and automated way.
When users place an order it is added to the order book. For example, you want to sell 1 Bitcoin at a price of $50,000 but the market price is a lot lower. Your order will be added to the order book but unless someone wants to buy it for that price, the order will stay open until filled or canceled.
By facilitating such trades exchanges can charge trading fees that accumulate over time. Many of them have released their own tokens which allow token holders to share some of their profits. It is a similar business model as stocks but dividends are not always guaranteed.
Well-known trading platforms like Coinbase, Binance or Kraken, may offer CFD (Contract for Difference) trading. This is also known as margin trading. It allows users to predict and bet on the future price of an asset, rather than trading it at current prices. For example, users can open “long” or “short” positions making profits when the price goes up or down. Those that are betting long are predicting that the price will rise while short positions predict downward movement.
Margin trading can be different depending on the platform. In general, traders can get loans to trade at 10X or 100X their capital but with increased risk.
Which cryptocurrency exchange is the best?
As already mentioned, the quality of services that an exchange provides will highly depend on their age, experience, and reputation. Some will offer lower trading fees and others will attract users with high lending and staking fees. It is good to know what makes one exchange better than the other so let’s look at some of the biggest names in the space.
Even though it was involved in a few security breaches and scandals, Binance seems to be looking out for its users. Whenever funds are compromised, if the blame falls on Binance users will get a refund. The trading services they provide will suffice even those with high demands. They are constantly improving user experience and competing with low fees and high interest rates.
Poloniex is definitely one of the oldest exchanges in existence when it comes to cryptocurrency. It was founded in 2014 and ever since the trading experience has improved immensely.
Poloniex also tries to stay competitive with high interest rates but there are some downsides to it. Liquidity isn’t that high and the trading volume may be insufficient for more serious investors. Those that are looking to invest smaller amounts, on the other hand, will find Poloniex very useful.
CEX.io is more of a brokerage service than an exchange but it does offer trading tools for those that need them. The exchange is more fitting for institutional investors while also enabling retail customers to purchase cryptocurrency with credit cards.
A US-based cryptocurrency exchange that is one of few that are regulated under U.S. law. Coinbase offers both brokerage services and a trading platform along with custodial services for those that want to keep their investment safe. In 2021 Coinbase will hold an IPO and make a transition to a publicly-traded company. Coinbase is expected to grow and expand its services once it gets listed on the NYSE.
Geminin is another US-based exchange that was founded by U.S. Olympians, the Winklevoss brothers. It is very similar to Coinbase as it offers almost all of the same services. The company is registered in the United States and the owners are known supporters of Bitcoin since the very beginning.
Kraken is the only cryptocurrency exchange that is licensed to operate as a bank as well. Over the years it has evolved into one of the most diverse platforms for purchasing and trading cryptocurrency. Advanced traders can utilize Kraken Pro and trade cryptocurrencies freely at market prices.
This is one of the youngest cryptocurrency exchanges you may find but a very useful one nonetheless. Their user numbers have grown over the years due to constant updates on the platform. Right now, KuCoin offers cryptocurrency trading, lending, futures trading, credit and debit card purchases, margin trading, and a lot more.
This exchange is advertised as a U.S. blockchain platform providing real-time trading and industry-leading security. Users can instantly buy and sell cryptocurrency on this platform with fixed fees that are lower than the industry standard. Even though it may not be very suitable for complete beginners, the reading material that is provided by this exchange should get anyone started with ease.
Unlike all the others on this list, Coinmama focuses on brokerage services only. They aim to provide quality services to users that want to purchase cryptocurrencies in a safe and easy way. All purchases are executed almost instantly with very clear instructions. The whole interface of the website is designed to be more accessible for complete beginners.
What features should you pay attention to?
As you have probably noticed by now, all exchanges are different in one way or another. To fully understand what is actually important to know about them, here are a few things you should look into before making the final decision.
Deposit and withdrawal fees – Knowing what fees are included in your trades and purchases is very important. Since the cryptocurrency industry isn’t regulated on the same level as stock exchanges, there are risks involved in using them. Make sure that you are familiar with the costs of your transactions in both directions.
Processing time – The cryptocurrency markets can move fast and if you want to get involved immediately not all exchanges will be able to provide such a fast service. Be sure that you know how much it usually takes for deposits and withdrawals to be processed. Otherwise, it may take weeks before your funds reach the exchange or your bank account.
Supported countries and coins – Restrictions for certain countries may be in place depending on where the exchange you are using is located. Make sure that your country is supported but also check if they offer the coins you want to purchase or trade. Even if your country is supported you may not be able to find what you are looking for.
Limits and restrictions – Different platforms have different limitations but almost all of them won’t allow for huge amounts of cash and crypto to be moved around before verifying your identity. Some exchanges like KuCoin or Binance will allow unverified users to withdraw up to 2 BTC daily but others will probably keep those limits lower. Always make sure that you know their daily and monthly limits before depositing your funds.
Reputation – News travels fast in the cryptocurrency space, especially when money is involved. Exchanges are constantly under pressure to provide reliable services with maximum security but sometimes they can fall short of our expectations. Many of them have been compromised over the years so check their portfolio and background before conducting business. Always be on the lookout for potential security threats and loopholes.
KYC – Know your customer is an identity verification process that most exchanges will require. This process involved sending them proof of your identity which involves photos of your passports, utility bills that prove your address, and many other documents. Since all of this is considered personal information, you should be careful who you share it with. There were many incidents in the past where whole databases get stolen and sold on the dark web. Check if the exchange of your choice had such incidents before sending them your personal information.
Finding a reliable and secure cryptocurrency exchange may not be as easy as many would think. The whole industry is very young and the technology that comes with it is still at an experimental stage. Security breaches and other bumps in the road should be expected at all times so it is essential to make sure your exchange is actually safe to use. Those that stood the test of time with a clean track record should be an easy choice but they too can be unreliable at times.
Almost all exchanges are criticized for investing too little in customer support except for Kraken (for now). Different exchanges have different layouts and options. All of that can be confusing for beginners so having customer support on standby makes things a lot easier.
At the end of the day, it should always come to security and fair pricing. Users should conduct some research before making their choice to confirm that security is not an issue. After that, they should look into the pricing models used by the exchange. Are the fees fair and how do they compare to the competition? All of this information will help you make a more informed and secure choice. It is a lot better to spend some time on research than to be sorry when things don’t go as planned.