The purpose of cryptocurrency exchanges is to facilitate the buying and selling of digital currencies and tokens such as Bitcoin, Ethereum, and Dogecoin, much in the way that online brokerage platforms facilitate the buying and selling of traditional currencies.
When selecting a cryptocurrency exchange, it is essential to consider several aspects, including the types of supported assets, fees, payment methods, and levels of security. When compiling our list of the best cryptocurrency exchanges, we kept these considerations in mind so that we could better assist you in finding the proper marketplace.
Cryptocurrency Exchanges: What to Look for
Ease of access
Depending on where you live, state or national laws may prevent you from buying and selling crypto on certain exchanges. Some nations, such as China, prohibit their residents from accessing cryptocurrency exchanges.
In the US, there is a great deal of regulatory uncertainty around cryptocurrencies, and several states have implemented their laws. For instance, to operate in the state of New York, exchanges must first obtain a BitLicense, and only licensed businesses are permitted to provide specifically recognized coins. While the majority of other states don't have laws as strict as those in New York, many do or are planning to. The National Conference of State Legislators reports that 31 states have digital currency-related bills pending in their legislative sessions for 2021.
On a website or in the terms of service, you may frequently find details on a particular exchange's geographical restrictions as well as accessibility variables related to them, including the national currencies that are accepted.
Security and privacy
Your cryptocurrency holdings are not as secure as cash in the bank or other conventional investments because cryptocurrency is not backed by any central institution. If you have a balance in U.S. dollars at an exchange like Coinbase or Gemini, that money is safe since it is kept in an FDIC-insured bank account. Nonetheless, bitcoin holdings are not covered by the FDIC.
Some exchanges offer insurance policies to protect the digital currencies users hold on the exchange from hacking or fraud, so you can keep your crypto safe.
Whether you intend to leave your cryptocurrency holdings in the exchange permanently or merely store them there temporarily before transferring them to your wallet, the security of the exchange is of paramount importance. Take a peek at the percentage of the exchange's assets that are kept in cold storage.
This is important because as the value of cryptocurrencies goes up, thieves will have more opportunities to steal them. In 2020, there were a total of 28 attacks on cryptocurrency exchanges. The biggest one led to more than $200 million worth of cryptocurrency being stolen from the KuCoin exchange in Singapore.
Find out how much of the exchange's assets are kept offline. Exchanges need to keep some crypto active to make trades possible, but it's smart to keep the majority of holdings in cold storage, which is offline and harder for hackers to get to. For example, Coinbase says that it stores 98 percent of customer funds offline and only 2 percent of those funds are actively traded. With that storage and its $255 million insurance policy, you have more reason to believe that your crypto assets will be covered if they are hacked.
Search for common online security features like two-factor authentication, which you may be familiar with from other platforms. This means that every time you log in, in addition to your username and password, you will also be required to authenticate your identity in some other way, such as by entering a code you get by text message.
In general, you may feel safest if you stick with well-known exchanges that already have a lot of customers. When you do business with smaller or newer exchanges that don't have clear online descriptions of their security measures and services, you may be taking more of a risk.
Fees
Fees are something else to think about, but you shouldn't automatically rule out an exchange because of its large fees. A course designed to teach novice investors about cryptocurrency. Sometimes the larger and more well-known exchanges' higher fees are justified by the safety nets and insurance they offer their users.
A percentage of your total trade value is typically how exchange costs are calculated. Exchange fees might fluctuate with market conditions, as is the case with Cash App and other similar services. The fees you'll pay depend on whether you're the vendor or the buyer. If you trade multiple currencies, you may incur additional charges. When using a cryptocurrency exchange, before you deposit any funds, make sure you fully understand the fees that will be assessed and when they will be applied.
Liquidity
With sufficient transaction volume, your cryptocurrency holdings will be more liquid, allowing you to sell them when you want. This is especially important if you plan to buy, sell, or trade your crypto. The importance of size in this context might be emphasized once more. Trade volumes tend to be higher on the most active exchanges.
You have a better chance of purchasing or selling the cryptocurrency you possess at the best price, according to Montgomery, when many deals are happening within the exchange at any given time. Given the rapid fluctuations in cryptocurrency pricing, you may pay more on a less-trafficked exchange than you would on one with a larger volume of trades. Imagine you want to invest in Bitcoin and have set your sights on a price of $32,000 or less. It's possible that your purchase won't go through until the price has moved back up if you're using a low-volume exchange.
Tokes offered
There are thousands of different cryptocurrencies, but not every exchange supports them all. Popular coins like Bitcoin and Ethereum can be found on almost any exchange. On the other hand, you might need to do a little more research before buying any of the newer altcoins, currencies with a little market cap, or meme coins.
Keep in mind that these coins are usually much riskier gambles than the more well-known cryptocurrencies. In light of this, many industry insiders advise keeping with the industry-standard coins, such as Bitcoin and Ethereum. You should only invest the amount of money that you can afford to lose while buying cryptocurrency on an exchange.
Storage
The issue of where and how to keep cryptocurrency might divide the crypto community. Many people adhere to the maxim that "not your keys, not your coins," which states that you should keep your public and private keys for your cryptocurrency holdings in your possession rather than having the exchange or custody service keep them for you.
However, if you are just starting with cryptocurrency, it may be wise to use an exchange that lets you store your funds in a digital wallet. You may decide to retain your cryptocurrency in your wallet in the future, when you have gained more knowledge about your storage alternatives or after you have expanded your holdings. Ross, however, advises caution when dealing with an exchange that restricts your storage options to only its own, like PayPal. With the announcement that it will be developing a cryptocurrency wallet, Robinhood will soon allow users to move their coins off-platform.
Ross advises that once you gain some "street cred," you might consider relocating your wealth. If you choose an exchange that doesn't provide you the opportunity to withdraw your coins, you may find yourself stranded if you change your mind later and decide you'd rather keep them in your cold wallet, for example.
Knowledge about taxation
When filing your taxes, declaring cryptocurrency gains or losses might be a headache. People should make sure their tax situations are up to date as the tax situation evolves around crypto assets, Ross adds.
Transactions using cryptocurrency should be reported as capital gains. Therefore, you should be aware of the USD price of your cryptocurrency both when you buy it and when you sell it.
Robinhood, unlike more conventional exchanges, issues a Form 1099-B detailing your cost basis and gains and losses when you trade exclusively through its platform.
According to Shehan Chandrasekera, CPA, head of the tax strategy at crypto tax software firm CoinTracker.io, "when you utilize cryptocurrency exchanges like Binance, Kraken, CoinBase, etc., they don't offer you that paperwork." Why? Because exchanges that let you withdraw your funds can't monitor your private wallet or the deals you conduct on other platforms. When this occurs, tax preparation becomes more complicated since users need to use a program to reconcile their full picture, obtain the data, and then file their taxes.
The takeaway
There are further aspects that you, based on your individual preferences, might take into consideration. One of the most helpful things you can do is to educate yourself as much as you can about cryptocurrency before you invest any money in it. You should make the effort to educate yourself. If you are finding issues and have any questions about cryptocurrency so Primafelicitas is one of the top blockchain development companies, they develop full-fledged cryptocurrency exchanges that overcome the shortcomings of present-day digital currency trade.
