Golden rules to follow when choosing a Crypto exchange

For those new to cryptocurrency trading, it might be overwhelming at first when deciding where to start. And for experienced traders, the overflow of information and large number of available exchanges can still create confusion. All trading activity starts with an exchange, and every exchange has its positive and negative qualities. In this article, we will look at the most important features that newcomers should zero in on when choosing a suitable cryptocurrency exchange.

Trading Pairs

At the moment, there are 1600+ coins available on the market and exchanges decide which ones they offer to their users. For traders, it is important to choose the most fitting trading pair in order to make profit. The majority of exchanges offer many pairings with BTC and ETH which means that you can buy altcoins with these. A few of the leading exchanges stand out from the others thanks to their considerable number of crypto pairs. It is not favorable to resort to exchange hopping because of the fees involved, therefore, making sure your desired trading pairs are present is the first step when choosing your exchange.

Liquidity and Volatility

A long list of trading pairs is great but only as long as an exchange also has corresponding liquidity. In the context of cryptocurrency trading, liquidity refers to the ability of a coin to be converted into fiat or other coins. High liquidity has definite benefits for traders. High liquidity ensures that an asset gets sold at its market price, protecting it from the volatility that would envelop it were it only traded among a small group of investors. An asset with high liquidity will not suffer major price swings due to large orders, so its performance is more stable and its price is not easy to manipulate. For the same reason, liquid assets are offered at a fair price to all investors, small or large orders alike. It creates a competitive market where the sellers will offer lower prices and the buyers will bid at higher prices. In these conditions of healthy demand and supply proportions, orders get fulfilled faster so you can quickly enter and exit a trade. 

Trading Fees

Trading fees are going to eat away at your profit, so they should be counted in when initiating a trade. Exchanges compete with low trading fees in order to attract traders. At the moment, exchanges with the lowest trading fees are Binance, HitBTC, CEX.io, GDAX and Bitfinex. Relevant up to date fees can be checked in the knowledge base or support center of the exchange.

Some exchanges also reward their traders for adding volatility to the market while also offering low trading fees for the rest of their users. It is very important to study the trading fees on your exchange to make sure your potential profits are not cut short by unexpected charges. Besides trading fees, it is also essential to make sure you are able to withdraw your funds if needed and assess the withdrawal fees involved at that stage.

KYC and Regulations

Another important procedure that traders face upon withdrawal of funds is verification. All legitimate exchanges have to comply with regulation guidelines and require traders to complete Know Your Customer protocols to verify client identities and prevent money laundering on their platform. To verify your identity, most exchanges will require Proof of Identity (National ID, passport or a driving license) and Proof of Residence (electricity, gas or water utility bill with your name and address). 

Some additional regulations also apply to exchanges depending on their location. For example, many exchanges will not be able to provide their services to U.S. citizens due to American crypto regulations. This is why it’s best to complete the verification process before you deposit any funds to an exchange to avoid issues later on. 

Account Features

API

One of the most important tools for traders is a functioning API. A trading API allows you to execute orders on an exchange while price APIs enable users to pull historical and live price data directly from the platform. Another common API that exchanges provide is live execution APIs. It allows traders to use third-party tools, such as crypto wallets with built-in exchange functionality or desktop trading applications, without having to log onto the platform itself. The speed of order execution and precision of the live price data updates depends directly on the advancement of the API. All reputable exchanges provide well-documented information on the APIs they employ. Both price and trade execution APIs are integral for algorithmic trading. They are mostly used by professional traders and hedge funds to execute automated trading strategies. 

One of the exchanges that became popular in part because of their excellent API that makes the process of integrating Bitcoin, Bitcoin Cash, Litecoin, and Ethereum into both new and existing applications is Coinbase. Coinbase’s API is available for free. It even extends to GDAX (Global Digital Asset Exchange), which is a U.S. based bitcoin exchange for professional traders.

In recent times, algorithmic trading is becoming more common for individual investors as well, for example, a lot of people have started utilizing trading bots and third-party software to execute trading strategies automatically. 

Sub-Accounts

Sub-accounts are also a very useful feature, especially for institutional traders. It allows users to add secondary accounts to their master account so they can carry out separate activities and control their online assets in a more organized way. And when using this feature, the master account has control of all secondary accounts which is great for security and management. At the moment, this feature is implemented in the best way on HitBTC with an intuitive interface of the platform that makes it easy to create and manage the accounts as well as calculate how much a user pays in trading fees with master and sub-accounts combined. It is also convenient that on HitBTC only master accounts are required to undergo the KYC procedure.

Trading Order Types

And if you are an individual trader, another feature that is important is order types. Most but not all exchanges offer the following trading order types: market order (buy/sell at current market price), limit order (buy/sell at a specific price or better), stop or stop-loss order (limit loss on a position), and scaled order (create multiple limit orders across a user-determined price range). There are also combinations of these order types offered at some exchanges. Traders need to determine their trading strategy first to identify which order type is best for them. 

Reputation and Security

Most exchanges offer basic security features such as 2-factor authentication and whitelist withdrawal addresses. You can activate 2FA for tasks like login, fund withdrawal, and setting adjustments. When this feature is enabled, a one-time password is sent to your device or phone number. No one will be able to log in without that password even if your login credentials are stolen. Some exchanges offer cold storage so the private keys to your account wallet are kept offline. However, exchanges always control your private keys, that's why it is always best to transfer your funds to your own wallet. 

Reputation is also very important to study closely. In the past eight years, 31 crypto exchanges have been hacked with an estimated $1.3 billion stolen. Not every exchange will refund their users if such a hack occurs. However, several crypto exchanges such as Binance, Coinbase and Gemini have either obtained insurance from third-party service providers or have internal insurance funds in place to compensate users, should an unexpected incident arise. It’s also demonstrative of security measures in place if the exchange has never been hacked. As far as public record goes, Binance, GDAX, Gemini, HitBTC, Kraken, and Bittrex are among the exchanges that have never fallen victim to a hacker attack on their platform.

DYOR (Do Your Own Research)

It’s a simple rule but many still neglect doing the necessary research before depositing funds on an exchange. Before choosing an exchange, make sure to look at enough real user reviews to get a clear picture of how the exchange operates. Some exchanges such as BitMEX, Primebit and HitBTC also offer demo trials of their platform where you can practice trading with virtual funds without taking any financial risks. This is a great way to get familiar with the platform and decide if it’s the right fit for you.

For new traders, it’s also important to remember that an exchange is not a bank and it’s not meant to hold your funds for you. If you are making a profit, make sure to withdraw your funds to a safe wallet or keep them in a cold storage. This way, you are in control of your crypto portfolio and can take security precautions as needed.