The total market cap of cryptocurrency is around US$420 billion while we are writing this article. With a peak of US$830 billion reached in January 2018, the value of cryptocurrency market has made the news’ headlines and the happiness of cryptocurrencies holders. But even if holding crypto assets is already a good investment strategy, cryptocurrencies need a market where they can be traded. This is what cryptocurrency exchanges do.
A cryptocurrency exchange is a platform that enables the conversion of fiat money to cryptocurrency and vice-versa, as well as the conversion of different cryptocurrency pairs. It is no surprise that the number of platforms has dramatically increased over the past few years (191 cryptocoin exchanges globally at the time of the article with a total 24 volume of US$4.05B), the absence of public regulation allowing high flexibility.
When it comes to choosing an exchange, do you know where to start to look? What can you expect? This is a sum up of the key factors to take into account, as a general approach first and then with a particular focus on individual’s needs.
Reputation and Reliability
Trusting an institution with your money is not a decision to be taken lightly. That is why, investors should do in-depth research about exchanges before choosing one. This implies researching what is their reputation in the market and weighting their reliability.
When performing this investigation, usual researches include the followings questions: who are the people running the exchange? For how long does this platform exist? What is its reputation? Where is it located? Does it have consumer protection and/or regulations? It may be obvious but exchanges running in Europe or United States should be more trustable than the ones operating in small and shady countries. Moreover, having regulations that can protect consumers can be very useful when trading this kind of assets.
A reliable exchange is one that will not let customers register to its service without a minimum of KYC (Know Your Customer) measures. To prevent money laundering and other illegal financial operations, an exchange should verify customers identity and be able to research their financial background by asking them to submit 2 or more pieces of identification. Due diligence should be done by the exchange not only on the customers but also on the coin they list. If an exchange lists scam coins or coins that are not known as reliable, it may be a sign that the exchange may not be truly trustable.
Ease of Use and Seamless User Experience
Investors being involved in cryptocurrencies and exchange are very likely to be digital savvy. Therefore, they expect a high level of convenience when using an exchange. That is why you may have a closer look at the ease of use of the platform you choose. Is there a quick and easy manner to transfer cash between my usual bank account and the exchange website?
The exchange should also allow transactions at every moment, especially when there is a high volume of trading and the platform is likely to be saturated. Hence, to keep an eye on the volume of trading is key: it is the number of transactions and their value. So ask yourself: can I make order when I want it the most? And in general, you also target a high liquidity of the market: is there enough sellers and buyers that will allow the exchange to run smoothly?
There is nothing like discovering an additional fee at the end of a transaction. Most often, this is the recipe leading to the system failure as it won’t bring in any customer. It is the same in the research of the perfect exchange scenario. Consumers should dig to find what will be the transaction fee and if there is not any hidden fee. Some exchanges can be competitive such as Cobinhood which has a 0% commission policy. Also, having a price tracking system is the basis to ensure transparency and to start trusting a cryptocurrency exchange.
One of the biggest risks of an exchange lies in its security. Crypto exchanges are unfortunately quite famous for being regularly cyber attacks’ targets. No later than the past month (February 2018), hackers could have stolen US$530 million from Japanese cryptocurrency exchanges’ users. Hence, investors should look at the existence of insurance of the exchange. They should wonder if the platform offers anti money laundering procedures such as the ones which research who the customers are.
However, with the presupposition that an exchange is not secure, the safest solution is to store cryptocurrencies in cold wallets. Downloading coins on offline wallets should ensure that your financial investments is solely in your own hands but it will make them less practical to trade.
Matching Customer’s Needs and Expectations
Your Location and Currencies
The location where you will trade from is also an essential criteria, as some functions of the exchange can be restricted depending on the country you live in. Also, if you choose an overseas exchange, you may have to wire money to buy cryptocurrencies. Think that some banks may decline your transfer, even if the exchange is licensed and supposedly trustable. This basically means defining where you are based, which currencies are supported, and which methods of fiat payments are accepted?
Beyond these general recommendations, each investor has very specific trading expectations. What is your purpose on the exchange? What is the level of your experience? Beginners traders may just want a simple interface and enjoying the peace of mind of stop-limit orders. On the contrary, more advanced users with risk appetence will enjoy systems providing trade margin options for example.
Your Customer Support
Moreover, if you are starting in the world of cryptocurrencies and exchanges, you may be inclined to choose a platform offering a good and easy-to-access customer support. Some exchanges only provide obscure FAQ pages where you will have to dig to find the help you need. So, be sure to choose one with at least a customer help desk number or one reputedly responsive, with a human individual to help.
Amotion Labs is a fintech company specialised in blockchain consulting and cryptocurrencies consulting. We understand the broad variety of customers needs, which allows us to develop state-of-the-art cryptocurrencies exchanges. Create and launch the best white label platform which can accommodate all types of coins, from ERC20 to Bitcoin and QTUM.