Table of Contents Hide
- What is a Crypto Exchange?
- The Different Types of Crypto Exchanges
- Things to Look Out for Before Picking a Crypto Exchange as the Safest Option
- Crypto Exchange FAQ
- Which is the best crypto trading platform?
- What is the biggest crypto exchange?
We’re not talking about mythical creatures or the Internet’s current catchphrases when we mention names like Kraken, CoinEgg, Gemini, and Binance. They are some of the biggest cryptocurrency exchanges (online markets where you can buy and sell cryptocurrency). Like you already know it’s highly unlikely to acquire crypto from your bank or an investment agency. You’ll need to open an account on a safe crypto exchange platform to swap your US dollars (or other currencies) for digital assets.
Some, like Coinbase, have been there since the early days of Bitcoin when crypto trading had significantly fewer regulations. Others, such as Robinhood and PayPal, are better recognized for their other services and late entry into the markets.
Here’s what you need to know about why picking the safest crypto exchange is so crucial, as well as the factors experts recommend considering before making a decision.
What is a Crypto Exchange?
A cryptocurrency exchange is a platform where you may buy and sell digital currencies. You can use exchanges to trade one cryptocurrency for another — for example, changing Bitcoin to Litecoin — or to buy cryptocurrency with fiat currency, such as the US dollar. The prices of cryptocurrencies on exchanges are based on current market prices.
Furthermore, you can also use an exchange to convert cryptocurrencies back into US dollars or other currencies, which you can keep as cash in your account (to trade back into crypto later) or withdraw to a conventional bank account.
According to Tyrone Ross, a financial advisor and CEO of Onramp Invest, crypto investing platform for financial advisors, there is no one crypto exchange that is appropriate for everyone. Instead, he recommends evaluating your individual crypto interests and finding an exchange that matches your objectives.
The Different Types of Crypto Exchanges
It’s critical to understand the different types of exchanges before deciding on the best or safest ones for your needs.
#1. Centralized Exchange
The centralized exchange is the first and most common type of exchange. Coinbase, Binance, Kraken, and Gemini are examples of popular exchanges in this category. These are private companies that provide cryptocurrency trading services.
For the most part, all of the above exchanges have active trading, high volumes, and liquidity. Centralized exchanges, however, are incompatible with the philosophy of Bitcoin. Furthermore, they run on their own private servers, creating an attack vector. If the company’s servers are hacked, the entire system could be shut down for a period of time. Worse, sensitive information about its users would go public.
But then the larger, more well-known centralized exchanges provide by far the easiest on-ramp for new users, and they even offer some form of insurance in the event that their systems fail. While this is true, when you buy cryptocurrency on these exchanges, they help to store your crypto in their custodial wallets rather than your own wallet, which you control.
In other words, the provided insurance is only applicable if the exchange is at fault. If your computer and Coinbase account, for example, were to be hacked, you would lose all of your money and be unable to file a claim for insurance. As a result, it is best to withdraw big sums of money and store them safely.
#2. Decentralized Exchange
Decentralized exchanges function the same way as Bitcoin. There is no central point of control in a decentralized exchange. Instead, think of it as a server, except that each computer on the server is distributed around the globe, and each computer that makes up one part of the server is controlled by a single person. If one of these computers fails, the network will continue to function since there are enough additional computers to keep the network working. This is in stark contrast to a single corporation operating a single server in a single location.
So attempting to attack something that is dispersed and decentralized in this way is far more difficult, making such attempts implausible and likely futile.
And because of this decentralization, these types of exchanges are not subject to the restrictions of any regulatory authority, as the system is not controlled by a single person or group. Basically, individuals who engage come and go, therefore a government or regulatory body can’t really go after any one person or group. This means that those who trade on the site are not under any obligation to reveal their identities. In other and are free to utilize the network in any way they deem fit, whether legal or illegal.
Things to Look Out for Before Picking a Crypto Exchange as the Safest Option
The following are some crucial factors to consider before you pick a crypto exchange;
Due to state or national rules, you may be unable to buy or sell cryptos on specific exchanges depending on your region. Some countries, like China, have outright prohibited individuals from using cryptocurrency exchanges.
Furthermore, there is a lot of regulatory uncertainty around bitcoin in the United States, plus several states have enacted their own legislation. New York, for example, requires exchanges to obtain a BitLicense before operating in the state. Also, it only permits licensed organizations to offer certain recognized coins.
Most other states do not have as rigorous rules as New York, although many do regulate in some capacity or are considering doing so.
Cryptocurrencies aren’t guaranteed by a government, and your crypto holdings aren’t insured in the same way that bank deposits or traditional investments are. Some exchanges, such as Coinbase and Gemini, maintain all of your U.S. dollar balances in FDIC-insured bank accounts. However, FDIC insurance does not cover bitcoin balances.
Some exchanges have insurance policies in place to protect the digital currencies that users have on the exchange against hacking or fraud. For example, Coinbase has a $255 million insurance coverage. In other words, account-holders would be safeguarded if Coinbase’s reserves were hacked and any amount of crypto up to $255 million was stolen. Others, such as Kraken, rely on their security methods rather than insurance plans to protect their clients.
So whether you want to keep your crypto holdings on an exchange for a long time or merely have them there for a short time before moving them to your own wallet, the security of the exchange should be a top consideration. Examine how much of the exchange’s assets it stores offline in hard storage, for example.
This becomes even more critical when the value of cryptocurrencies rises. This is because higher value equals more lucrative targets for potential criminals.
Also, examine how much of the exchange’s assets it keeps offline. While exchanges must keep some crypto active to allow trades, it’s a good idea to keep the majority of your assets in cold storage, or offline, where hackers will have a harder time accessing them. For example, Coinbase claims to store 98 percent of user assets offline, with only 2% regularly exchanged.
Something else that can also beef up security is setting up two-factor authentication. You may already be familiar with this from other sites.
In general, you’ll be safer sticking with more well-known exchanges with a huge consumer base. Doing business with smaller or newbie exchanges that don’t have their security procedures and products stated out properly online may be riskier.
Another factor to examine is fees, but don’t let a hefty charge structure put you off an exchange. According to Spencer Montgomery, founder of Uinta Crypto Consulting, a program for new investors to learn about crypto, “the easier they make it for you to acquire, the greater the cost you’d be paying.” Higher costs may be an acceptable compromise for the additional protections and insurance provided by larger, more popular exchanges.
Meanwhile, for some exchanges, costs may be fixed, but they are frequently calculated as a percentage of your deal. For others, such as Cash App, fees are variable based on price fluctuations. Also, fees are frequently imposed on each transaction, and they may vary depending on whether you’re the vendor or the buyer. The currencies you trade could also be another factor.
So, before handi over your money, be sure you understand how and when an exchange will charge you for your crypto transactions.
If you want to purchase, sell, or trade cryptocurrency, the exchange you choose should have enough trading volume to keep your assets liquid. This means you can sell them whenever you want. There are also scenarios where volume does matter. The most popular exchanges are generally the ones with the highest trade volumes.
When a large number of trades are taking place on an exchange at any particular time, Montgomery believes you have a better chance of purchasing or selling the crypto you own at the best price.
Basically, cryptocurrency prices fluctuate rapidly, so if you go for an exchange with a low transaction volume, you may end up paying a higher price than you would on a more popular exchange. Assume you decide to purchase Bitcoin when its price falls below $32,000. If you’re on a low-volume exchange, you can end yourself paying a different amount than you expected if your trade doesn’t go through until the price has moved back up.
Binance, Coinbase, and Huobi are the top three exchanges by volume in the world right now.
#5. Coins Offered
Not all of the thousands of cryptocurrencies are available on every exchange.
If you’re looking for a popular coin like Bitcoin or Ethereum, you’ll almost certainly find it on any exchange you pick. On the flip side, newer altcoins, currencies with a moderate market size, and meme coins may necessitate a little more research.
Meanwhile, always keep in mind that these coins are often much riskier bets on top of the already extremely speculative, more established cryptocurrencies. As a result, many experts advise sticking with well-known brands like Bitcoin and Ethereum.
#6. Instruments for Education
When it comes to choosing an exchange, Ross adds that the ability to learn more about different coins, digital assets, and blockchain technology is a top priority for crypto newbies.
“What exactly do they do to ensure you’re always up to date in terms of your education?” he inquires.
Coinbase, for example, has a program called Coinbase Earn. The program rewards users for learning about new coins. It gives you a tiny amount of cryptocurrency in exchange for viewing movies and doing quizzes about various coins. You can then keep it or convert it to something else. Others, such as Gemini’s Cryptopedia or Binance Academy, provide on-site classes and materials to assist you learn about crypto markets, history, and developments.
As a newbie, an exchange that allows you to store your cryptocurrency in your online wallet can be a good choice. You may decide to keep your crypto in your own wallet later. That’s you’ve learned more about storage choices and expanded your holdings. However, Ross advises that you avoid exchanges that only allow you to store on their platform. For example, Robinhood has been chastised for not allowing clients to keep their own crypto purchased through the platform.
“As you gain experience, you may wish to shift your coins to a different location,” Ross advises. If you choose an exchange without that option, you may find yourself stuck.
#8. Information on Taxes
“As the tax position surrounding crypto assets evolves, it will be critical for consumers to ensure that their own tax status is up to date as well,” Ross says.
Any crypto trades you make must be reported as capital gains on your tax return. This means you’ll need to know the worth of your crypto when you acquire it in US dollars and when you sell it.
For example, when you trade on Robinhood’s platform, you’ll get a Form 1099-B. This shows your cost basis, gains, and losses, which isn’t the case on more traditional exchanges.
On the other hand, “when you use cryptocurrency exchanges like Binance, Kraken, CoinBase, and others, they don’t provide you with that form.”
In any case, getting a hang of these things will give you an edge moving on.
Crypto Exchange FAQ
Which is the best crypto trading platform?
Some of the best crypto exchanges include;
What is the biggest crypto exchange?
When it comes to size, Binance is unarguably the biggest crypto exchange in the game with over 61,000 users.
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