Seven Factors to Consider When Choosing a Crypto Exchange

Cryptocurrency exchanges offer a lot of convenience. But choosing the right one can be crucial, especially when it comes to fees, security and more.

Cryptocurrency trades can be tricky, but it's a good idea to use a crypto exchange. There are many options to choose from, but it pays to know which ones are the best.

Early adopters who were first to acquire cryptocurrencies in the early days often did so through mining or by swapping them in online forums. But unless you have lots of time (and technical expertise), chances are you’ll want something more convenient.

Crypto exchanges are businesses that store crypto assets and match you with other buyers and sellers, enabling you to trade crypto much like you would trade stocks in a brokerage account. (Most big-name stock trading companies including Merrill Lynch and Schwab don’t accomodate crypto trades.)

But while crypto exchanges have made trading crypto more accessible, there have been some big problems too. From security breaches to trading fees that dwarf what investors might pay to trade other assets.

Here are seven key factors to consider before choosing a cryptocurrency exchange:

1. Check the number of coins you can trade in your exchange account.

As cryptocurrencies continue to grow in popularity, there are now over 10,000 different coins to choose from. No exchange offers every digital asset, so make sure yours provides the ones you want. Think about whether you are mostly interested in bitcoin, ether and the handful of leading DeFi tokens that help drive smart contracts or want a more streamlined or complicated menu.

For beginners, it's a good idea to start with large well-known exchanges such as Coinbase and Kraken. These offer a wide array of coins and tokens that can accommodate most investors, from beginners to active traders. Coinbase lets you trade more than 450 coins, while Kraken offers more than 160 coins including so-called meme coins like dogecoin and Shiba Inu coin.

The cryptocurrency world can be a confusing place to navigate—but it's also full of opportunities. There are several exchanges, often overseas, that let you trade dozens of obscure coins. One note of caution: These don't always follow U.S. laws or offer the same level of investor regulations that you might expect from, say, a U.S. stock trading platform.

If you want to trade stocks, as well as a few prominent coins such as bitcoin cash, ether and dogecoin, consider Robinhood—the app that lets you trade a handful of coins commission-free.

2. Make sure that there is enough liquidity in the market.

To avoid paying a big markup, look for an exchange with liquidity—the ability to easily turn your cash into coins or vice versa—that also has a good reputation. That’s especially true because prices move fast in the world of digital assets. When the price of a coin you want to buy is rocketing to the moon, you’ll want to know your buy order is filled quickly and at a price close to the one you see quoted on your screen. (Ditto if you are trying to sell as one plunges back to earth.)

The quickest way to get a handle on this is to look at an exchange’s trading volume: the higher, the better. CoinMarketCap provides the 24-hour trading volume for hundreds of exchanges. Coinbase and Kraken recently have shown the highest trading volume.

In addition, you’ll want to check out an exchange that’s been around for a while, with at least five years of experience and one that also verifies the assets it claims to hold on your behalf. The verification feature is important because it shows that the company really has control over its coins, according to Alexander Enser, founder of crypto education company MyCryptoAdvisor. Kraken, he points out, has a “verify my audit” button that lets users see when an independent audit last verified the coins in their accounts.

3. Compare transaction fees

Cryptocurrency exchanges differ from your brokerage accounts at Schwab or Fidelity. While you can now trade stocks, bonds and ETFs for free, crypto exchanges typically charge a fee every time you deposit, trade or make a withdrawal. Fees range from 0% to 5%, depending on your payment method and the type of transaction. Fee tiers are typically based on your total trading volume over a 30-day trading period, and the percentage you pay generally falls as the size of your trades increases. For example, if you traded $1,000 worth of tokens 15 times in a month on Bitstamp, fees would amount to $75. But if you made a single trade of $20,000, the fee would be only $50—saving you money!

Fees at some major exchanges in the US:

  • FTX US: 0% to 0.4%
  • Coinbase: 0.5% to 4.5%;  varies by type of transaction
  • Kraken: 0.9% to 2 %; varies by type of transaction
  • 0% to 2.99%; varies by type of transaction
  • BlockFi: 0%; spread of 1%
  • Binance.US: 0.1% to 5%; depending on payment method
  • Bitstamp: 0% to 0.5%

4. Ensuring there's enough security in the exchange is very important

It's no secret that crypto exchanges are vulnerable to hackers. Mt. Gox, one of the most prominent early exchanges, collapsed after $460 million in customer assets were stolen in 2014. As recently as last December, exchange BitMart was hit for $150 million. (BitMart has said it will refund investors). So it's common sense to only use an exchange that has a clean track record and that can safeguard user assets effectively.

Most cryptocurrency exchanges offer basic security measures like two-factor authentication. You can protect yourself from crypto theft by making sure that you take advantage of additional safety features the exchange offers. For example, the Exchange mobile app supports biometric login, which uses facial and fingerprint identification on your Android smartphone to verify your identity.

To minimize the likelihood of importers and exporters participating in illegal activities under the name of Bitcoin, major exchanges such as Kraken and Gemini require you to provide U.S. government-issued identification such as a passport or driver’s license when you open a new account. They also have additional layers of codes that need to be authenticated when you buy or sell, when you change funding levels, or if you make major account changes, like freezing your account, that require a master password.

5. Consider the controls 

Stock exchanges like the New York Stock Exchange are tightly regulated. By comparison, crypto exchanges are the Wild West. One reason is that although the NYSE has been around for hundreds of years, the cryptocurrency is just over a decade old. Another issue is that Washington is still squabbling over the right way to oversee the crypto universe, with agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission still jostling for positions. prioritized.

Until the dust settles in Washington, it's best to look for an exchange that already has security controls and financial audits in place. At the very least, any exchange you work with can show that it has audited Service Organization Control reports. SOC 1 confirms that the financial operations and reporting controls of the exchange are well designed and functioning, while SOC 2 confirms that technological systems promote the security, integrity of Exchange processes, network availability, and secrecy controls are working properly.

Unfortunately, it is not always easy to find these reports on exchange websites. Exchanges can submit press releases when they complete SOC 1 and 2 checks, as Coinbase did with auditor Grant Thornton in 2020 and Gemini did with Deloitte in 2021. But what if you can't If you find evidence of these reports online, you should call customer service.

Some US states have been proactive in regulating, in the hope of protecting consumers. For example, exchanges like Gemini, Coinbase, and Bitstamp have Bitlicense issued by the New York State Department of Financial Services, which verifies that strict business controls are in place.

6. Check insurance policy

Digital security that will prevent hackers from stealing customer assets should always be the #1 priority for crypto exchanges. But the good guys will still have a healthy insurance policy to watch out for.

Many exchanges now have commercial crime insurance, which often covers dishonesty, theft, robbery, destruction or cyber fraud. For example, Gemini says it maintains $290 million in digital asset insurance for specific losses. However, coverage varies widely between exchanges, so it is important to check what they cover. You can do so in the user agreement you are provided with when you sign up and regularly in the FAQs on exchange sites.

Another important requirement: Make sure any exchange offers Federal Deposit Insurance Corporation protection for your cash. Chances are your crypto trading account won't just hold funds. You will also have to keep some deposits in US dollars as you move money in and out of the crypto market. Exchanges should keep this money in a custodian account at an FDIC-insured bank, which will protect you with deposits of up to $250,000 in the unfortunate event of a bank failure. Most major exchanges offer this level of protection, but not all do.

7. Processing tax reports

If you make money trading cryptocurrency, the IRS wants to know about it. In fact, cryptocurrency trading profits are taxed the same way as profits you can make trading stocks and bonds. Unfortunately, reporting this information to the IRS is a lot more complicated.

When it's time to file your taxes, you should look for K-1, 1099-MISC, or IRS Form 8949 Schedule D returns from digital asset providers. These details your profit and loss for the year and are equivalent to a Form 1099 submitted by a stockbroker. The problem is that some crypto exchanges (especially those based in foreign jurisdictions) do not submit these forms. And when the forms arrive, they can only appear after the April tax deadline. (In that case, be prepared to apply for an extension.)

If tax reporting is important to you when buying a new exchange, search for “crypto tax” on its website or contact customer service to ask when and if tax forms will requested. sent to you. For example, if you earned more than $600 in crypto income during the year, Gemini will issue you a Form 1099-MISC. You can also download your Form 1099-MISC (or confirm that you did not receive it) in the “Reports and History” section of the “Accounts” page on the Gemini website or mobile app. motion. move.

“You need to know when and how tax information will be sent to you,” says Joseph Piszczor, a financial planner in Canonsburg, Pa.

Aug 22, 2022

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