Choosing the best cryptocurrency exchange for you can be an arduous and difficult process - especially if you’re new to cryptocurrency and altcoin trading. With countless factors to take into consideration, most novice investors and confused where to start. At BlockchainSEO, we're here to help.
This comprehensive guide on how to choose the best cryptocurrency exchange will walk you through five factors to consider when choosing a cryptocurrency exchange.
1. Where Should I Start?
If you’re just getting started investing in cryptocurrency, you’ll likely be looking to exchange fiat (USD, EUR, GBP) currencies for Bitcoin, Bitcoin Cash, or Ethereum. For starters, we suggest using Coinbase or CEX.io to purchase your first bit of crypto with either your debit or credit card.
Both sites are sufficient for newcomers looking to purchase any one of the most popular cryptocurrencies. However, things can get a bit hairy after you decide to branch out from BTC, BCH, and ETH, and invest in ERC20 tokens and other altcoins which aren’t available on either site.
When choosing a cryptocurrency exchange to use, below are five core values to look for:
- Geographical restrictions;
- Liquidity & volume;
- Security & anonymity; &
- User interface.
2. Five Factors to Consider Before Choosing a Cryptocurrency Exchange
Keep in mind, below are just a few factors to consider before choosing a cryptocurrency exchange and that exchanges should not be used to store large amounts of crypto (BTC, ETH, BCH, etc..).
A good rule to abide by is the ‘one month rule,’ which dictates users should not be keeping more than one month’s salary on an exchange, and should then be moving it to cold storage or a cryptocurrency wallet.
Most users are unaware that most cryptocurrency exchanges limit the geographical scope and location of its users. What’s the good of signing up for an exchange if you aren’t actually legally allowed to use it?
The first factor every user should consider before choosing a cryptocurrency exchange platform is whether an exchange is available for use in their country.
The availability of a cryptocurrency exchange in your country is likely determined by two fundamental factors:
- A country’s respective laws towards cryptocurrency and blockchain, &
- Certifications and licensing.
For example, Binance, one of the most popular centralized exchanges in the cryptosphere is available to all countries in the world except those on any trade or economic sanctions lists (ex. North Korea, Syria, and Iran). Furthermore, due to the regulatory uncertainty surrounding cryptocurrencies and blockchain in the United States, many cryptocurrency exchanges do not accept U.S. customers.
If you have familiarity with a country’s regulations and laws towards cryptocurrencies and blockchain, it’s highly recommended that you choose an exchange which transacts with such country. Placing money on an exchange which is based out of a highly politicized or crypto-adverse jurisdiction could ultimately pose great headache and hassle in the future, or even loss of your investments altogether.
Depending on how often you’re trading and how much you’re comfortable paying per transaction, cryptocurrency exchange fees are an extremely important factor to consider before signing up and trading.
Generally, exchange fees are determined by two components;
- The type of cryptocurrency you want to trade, &
- The site’s take of the transaction.
When using a centralized cryptocurrency exchange - an exchange controlled by a single entity with concentrated points of failure - both of the aforementioned factors will apply. However, when using a decentralized exchange (DEX) - an exchange which eliminates trusted third-parties and connects buyers and sellers directly (P2P) - users will only have to worry about gas fees paid to miners, along with maker and taker fees.
Think about it, if you’re trading frequently, hefty exchange fees can add up fast, while if you are just making a few trades per month, it won’t have as large-scale an impact on your overall portfolio.
Look for an exchange which explicitly states how much they charge per transaction in plain language, as steep fees could significantly add up and have a significant impact on your overall purchasing power. Furthermore, beware of exchanges who tout “low trading fees” but secretly charge exorbitant and outrageous withdrawal fees.
High liquidity and volume is a good indication of an exchange’s ability to fill your order at any point around the clock - no matter the size. Based on what you’re looking to trade, liquidity is an important factor to consider before choosing a crypto exchange.
If you’re looking to trade a widely used cryptocurrency such as Bitcoin, Litecoin, or Ethereum, using a centralized exchange is likely your best bet due to the ability of a large centralized exchange to fill your order within a mere matter of seconds. However, if you’re looking to trade smaller altcoins and ERC20 tokens, you may be strapped for options and may have to look to a smaller exchange to fill such orders.
Due to high listing fees on most centralized exchanges, a good percentage of altcoins opt for listing on smaller or decentralized exchanges. As decentralized exchanges have lower traffic, smaller user base, and operate on a P2P basis - where buyers and sellers act as their own individual order books - liquidity often suffers and can cause transactions to take longer than on centralized exchanges.
However, note that smaller projects and altcoins listed on decentralized exchanges are typically not available on large centralized exchanges, therefore if you are looking to trade small and newer tokens, decentralized exchanges are your best bet.
Also, keep in mind that exchanges with higher liquidity and volume typically have a more established reputation in the blockchain ecosystem.
Security & Anonymity
With already hundreds of millions of dollars lost to cryptocurrency exchange hacks this year, security should be a primary focus when choosing the best cryptocurrency exchange for you.
As mentioned above, centralized exchanges are more susceptible to large-scale hacks than decentralized exchanges due to their centralized points of failure. However, there are several steps and features which may be utilized to lower one’s chances of having their funds wiped completely or personally protected information revealed. Opt for exchanges which provide:
- Two-factor authentication (SMS or Google Authenticator),
- Complicated captchas, &
- Anonymity altogether.
While most centralized exchanges now require users to divulge personal information and details, there are still several out there that allow trading and withdrawals up to a certain amount without having to provide such information.
And, if you’re looking to go completely anonymous, we highly recommend you use a decentralized exchange, which allows users to sign up without having to provide any identifying details. Having eliminated the costly and vulnerable third-party middleman, decentralized exchanges offer the ultimate protection for your funds and identity (in terms of exchanges).
If you’re just getting started investing in cryptocurrencies, having a simple and easy to use interface is a core feature you should be looking for in an exchange. As centralized exchanges have higher liquidity and higher volumes of trades, they have typically invested large sums into simplifying their trading interface. A simple and easy to use interface helps keep users and investors informed while having some degree of assurance that they are executing the proper action.
Decentralized exchanges on the other hand are generally suited for more experienced traders who understand the ins and outs of navigating an exchange’s interface. However, with the increasing popularity of decentralized exchanges and increased trading volume, decentralized exchanges are beginning to overhaul and improve their UI in hopes of attracting both seasoned and novice investors.
If you’re looking for a decentralized cryptocurrency exchange with an easy-to-use and interactive interface, check out the Binance and their DEX.
3. Final Thoughts
With hundreds of exchanges in the crypto ecosystem - and dozens popping up by the month - it can be an overwhelming task choosing a safe and secure cryptocurrency exchange. However, if you keep the above five factors in mind when choosing an exchange, you’ll be off to a sound start.
It’s important for you to weigh the above factors and choose your exchange accordingly. And, just remember, never store an amount of cryptocurrency on an exchange that you aren’t prepared to lose. Exchanges should be used primarily for transacting, not storage.
Make sure to check out our blockchain blog for the latest crypto news articles and informative guides!