Cryptocurrency Exchange Features: In our previous educational piece, I talked about different types of cryptocurrency exchanges. Now you might be wondering how you should choose from the many available options. While there is no solid answer for this, to get you started, here are five out of the 10 ways to cycle through some of the most important characteristics in an exchange to help you make the best decision. To see all ten cryptocurrency exchange features, you can flip through my book, Cryptocurrency Investing for Dummies.
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Five Cryptocurrency Exchange Features to Consider
This is one of the biggest issues in the cryptocurrency industry. Exchanges are at constant risk of hacks, frauds, and pump-and-dump schemes. That is why one of the most important things you must do before choosing your crypto-shop(s) is to do your research.
Word-of-mouth and online reviews are some of the ways to help you choose a legitimate and secure platform. Some of the other safety cryptocurrency exchange features you must check on the exchange include:
- Two-factor authentication – also known as 2FA, is a method of confirming your claimed identity by using a combination of two different factors: 1) something they know (like your password), and 2) something they have (like a 6-digit number they’ll send to your mobile phone or your email address for the second step of the verification.)
- Cold storage for the majority of funds – This means they’ll store your funds offline, so that risk of online hacking is lower. We’ll explain more about this in Chapter 5.
- Proof of reserve – This requires the exchange to be audited to verify that the total amount of funds held by the exchange matches the amount required to cover an anonymized set of customer balances.
There are thousands of different cryptocurrencies you can invest in other than Bitcoin. We talk more about them in Chapter 8 of Cryptocurrency Investing for Dummies. Once you’ve decided which cryptocurrencies are right for you, you must make sure your exchange carries them.
Without sufficient liquidity, the prices and the speed of your transactions might get compromised. Once you’ve decided which cryptocurrencies you’d like to purchase, you should make sure your exchange offers sufficient liquidity and trading volume that helps your transactions to be fast and easy. This also means that you’re able to buy and sell without the cryptocurrency’s price being significantly affected by big market movers. The more buyers and sellers there are the more liquidity that exists.
The best way to measure an exchange’s liquidity is to look up their most recent trading volume. Coinmarketcap.com and bitcoincharts.com are two of the many cryptocurrency information websites who provide and rank exchanges based on their volume and liquidity.
There are a number of different ways exchanges charge their customers. It would have been great if they didn’t. But let’s face it, these exchanges are no charities. Charging customers fees is precisely how they make money to stay in business, and therefore one of the key cryptocurrency exchange features to consider. The most common method exchanges charge is by taking a small percentage of the amount you trade. Most exchanges charge a percentage lower than 1 percent. In order to stay competitive, some exchanges go above and beyond in cutting down their percentage fees, to around 0.2 percent. Often times, there’s a sliding scale which decreases the fee percentage as the monthly trading volume of the user rises.
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While paying less is always attractive, keep in mind that it’s best to prioritize security and liquidity to the fees. Because your investment will defeat its purpose if you pay next to nothing on transaction fees, and then lose all your funds in a hacker’s attack. For more on this type of calculations attend this free MasterClass.
Depending on where you live, you might find a specific exchange that works better for you in your country than another, more popular one on an international level. Things like the fiat currency they accept, and the fees they charge locals comparing to international customers are some of the things to keep in mind.
Additionally, the location of the exchange dictates the laws it will have to comply with. At the time of writing, many countries don’t have any specific regulations when it comes to cryptocurrencies. However, if and when they start to do it, it could significantly affect your ability to participate in the market through the exchanges in those countries.
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