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What To Consider When Considering An Exchange

By TradingBull | TradingBull_articles | 3 Feb 2021


Not all exchanges are created equal. Anyone that has gone through the onboarding process before actively utilizing multiple exchanges to trade digital assets will certainly know this. Different exchanges serve different purposes, for different types of traders, in different geographic locations. Understanding and evaluating the features, capabilities, and limitations of different exchange platforms is the critical first step in becoming an effective cryptocurrency trader.

 

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Onboarding

The Know Your Customer & Anti Money Laundering (KYC/AML) frameworks of different exchanges capture varying amounts of personal information. While some exchanges require traders to upload images of their passport / drivers license or enter their full social security number, other exchanges require just a handful of details that allow traders to still maintain a degree of privacy. Choosing the level of information a trader is willing to share is a factor all must consider before even accessing the platform to trade. 

 

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Tradable Assets

Tradable assets refers to the cryptocurrencies / digital assets listed on the exchange for buying, trading, or selling. While there are thousands of different digital assets available in the market today, not all assets are available on all exchanges. Many exchanges offer a small but carefully selected basket of cryptocurrencies on their platforms. Meanwhile, other exchanges offer a much wider variety of cryptocurrencies available for trading. While traders can have a degree of certainty about the curated list of assets on some exchanges, those offering a large number of assets leave this evaluation process to the traders themselves. Finding an exchange that offers the asset traders want to utilize is a critical first step in selecting an exchange.

 

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Technical Capabilities

In the same way that not all exchanges offer the same assets, not all exchanges allow users to complete different types of trades with those assets. Some exchanges may only allow users to enter long market orders. Short position, limit, stop, and other more sophisticated order types are not available on all cryptocurrency exchanges. Additionally, many exchanges do not allow for derivatives trades such as forwards, futures, options, and swaps. Many exchanges also do not allow traders to place trades using margin or borrowed funds. Each of these trade types carry their own risk and reward but some exchanges pursue simplicity over sophistication to ensure traders make qualified investment decisions. Beyond the assets that are available to trade, the types of trades offered also vary from one exchange to the next. Utilizing an exchange that allows traders to execute the type of trade they want can be just as important as selecting the underlying asset itself.

 

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User Interface

While many exchanges offer similar assets or similar order types, user interfaces are truly unique across all digital asset exchanges. These differences range from color schemes and icons, to dashboard layouts and real time reports. Many exchanges will present traders with a variety of financial metrics or candlestick charts, which can support more experienced investors in quickly gauging the current state of the market. Other exchanges present a more limited view of asset prices, only showing price and percentage change within a selectable timeframe. Choosing an exchange that shows the appropriate level of information based on traders’ experience level is an important part of selecting the right digital asset exchange.

 

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Security

The centralized nature of the world’s largest crypto exchanges make them prime targets for attack. Exchanges have often been the targets of successful cryptocurrency hacks, so understanding the security procedures and features of an exchange is an important consideration for all crypto traders. Two factor authentication, password requirements, or biometric scans are all well established security features many exchanges have implemented. But also knowing how and where this sensitive information is stored (including information gathered during the onboarding process) is an important consideration for traders that are concerned about the security of their funds.

 

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Performance

When it comes to acting upon market conditions, time is always of the essence. Nowhere is this more true than within the cryptocurrency ecosystem. Because prices can fluctuate wildly within short timeframes and arbitrage opportunities can be easily spotted, having an exchange that offers the performance traders need can be critical. Users should consider the time it takes to execute and close on certain orders types within the exchange. Additionally, having an exchange that can consistently operate during heavy trading volume periods may be an important consideration for many traders that have grown frustrated with some exchanges’ periodic outages during peak times. 

 

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Customer Support

Different exchanges treat their customers’ needs in different ways. Some exchanges may have a direct 24/7 support chat, email, or phone number, while others have expansive FAQ pages. For those unfamiliar with the intricacies of trading digital assets, an exchange with a strong customer support team may alleviate some of the barriers to entry in the crypto industry. Identifying an exchange that has the appropriate level of support based on traders’ needs can be another important consideration when choosing a digital asset exchange. 

 

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Costs / Fees 

Different exchanges have different ways of generating the revenue needed to maintain and improve the platform. Many exchanges take a service fee for executing customer orders. This is typically a small percentage of the total order placed for a given trade. Other exchanges may charge a monthly subscription fee to access and utilize the exchange. Identifying an exchange with the right cost and fee structure relative to the other features provided is an important consideration dictated by the frequency, size, and types of orders traders place.

 

Conclusion

In the end, all exchanges allow people from around the world to participate in the next generation of digital finance. But the way exchanges accomplish this is just as diverse as the participants themselves. Choosing an exchange that matches traders experience, needs, and objectives is the first step in developing a digital asset portfolio.

 

 

Daniel Pinto - Market Analyst @ TradingBull.io

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