What is a Crypto Exchange?
A cryptocurrency exchange is an online marketplace where you may buy and sell digital money. Exchanges can be used to swap one cryptocurrency for another, such as exchanging Bitcoin for Litecoin, or to purchase cryptocurrency using fiat money like the US dollar. Dollar. Exchanges reflect current market values of the cryptocurrencies they provide. Additionally, you may exchange cryptocurrency for dollars. To leave as cash within your account (if you wish to trade back into cryptocurrency later) or withdraw to your standard bank account, you can use a dollar or another currency on an exchange.
Tyrone Ross, a financial adviser and the CEO of Onramp Invest, a cryptocurrency investing platform for financial advisors, claims that there isn’t a single cryptocurrency exchange that’s suitable for every user. Instead, he advises considering your personal cryptocurrency interests and selecting an exchange that supports them. For instance, you could be searching for a certain currency or wish to keep studying as you begin investing in cryptocurrencies.
“Are you looking for something similar to Casa, which handles a lot of the work for me and eliminates the need for a public and private key? Will I visit Gemini in order to purchase this peculiar currency they have that I want? Or am I going to Coinbase because it has such awesome features that let me learn about and earn cryptocurrency? ”
What to Consider Before an Exchange
Accessibility
Due to local or international legislation, you might not be able to purchase or sell cryptocurrency where you are due to specific exchanges. Some nations, like China, have outright forbidden its citizens from using cryptocurrency exchanges.
There is a lot of regulatory ambiguity around cryptocurrencies in the US, and several states have implemented their own rules. For instance, New York only permits licensed businesses to provide specific recognized currencies and needs exchanges to get a BitLicense before they can operate within the state.
Although most other states don’t have laws as rigorous as those in New York, several of them do or are attempting to. The National Conference of State Legislators estimates that 31 states will consider legislation relating to digital currencies during their legislative sessions in 2021.
On an exchange’s website or in the terms of service, you may frequently discover details regarding its geographical restrictions as well as associated accessibility aspects, including the national currencies it accepts.
Security
Your cryptocurrency assets are not safeguarded the same way that bank deposits or conventional investments are since cryptocurrencies are not backed by any centralized authority. Some exchanges, including Coinbase and Gemini, retain any funds in the United States. dollars that you have in FDIC-insured bank accounts with them. However, the FDIC does not cover bitcoin holdings.
Some exchanges provide insurance plans to shield customers’ digital currency from fraud or hacking in order to secure their crypto. For instance, Coinbase has a $255 million insurance coverage. Therefore, account holders would be safeguarded if Coinbase’s reserves were compromised and any cryptocurrency up to $255 million was stolen. Others, like Kraken, depend more on their security procedures than insurance plans to safeguard their consumers.
The security of the exchange should be your top concern whether you want to retain your cryptocurrency holdings there or merely have them there for a short period of time before transferring them into your own wallet. Consider, for instance, how much of the exchange’s assets are kept offline in hard storage.
Given that rising cryptocurrency values make them more valuable targets for potential criminals, this becomes even more crucial. 2020 saw a total of 28 assaults against cryptocurrency exchanges, the biggest of which saw the theft of more than $200 million in bitcoin assets from KuCoin, a Singapore-based exchange.
Look at the exchange’s offline asset retention rates. While it is necessary for exchanges to keep a portion of their crypto active in order to allow trades, it is wise to keep the bulk of holdings offline or in cold storage, where access by hackers is more difficult. For instance, Coinbase claims that just 2% of user assets are regularly exchanged, with the remaining 98% being stored offline. The combination of that storage and its $255 million insurance coverage gives you even more assurance that your crypto assets will be protected in the event of a hack.
Additionally, you may search for standard online security features like two-factor authentication that you may already be familiar with from other sites.
This means that each time you log in, in addition to your username and password, you will also need to authenticate your identity in some other way, such as by entering a code you get by text message.
Generally speaking, you might feel safer staying with more well-known exchangers with a sizable client base. Doing business with smaller or younger exchanges that don’t have clear web descriptions of their security precautions and products may put you at greater danger.
According to Douglas Boneparth, a financial counselor and the head of Bone Fide Wealth in New York, “Size counts here.” He mentions Coinbase, which recently made its Nasdaq stock market debut. There are advantages and disadvantages to it, but now that financial information is publicly available, you can genuinely assess the company’s health, which is crucial when deciding whether to use an exchange or make an investment in any business or purchase their goods or services.
Fees
Another item to think about is fees, but you shouldn’t automatically disregard an exchange because of a hefty cost structure. Uinta Crypto Consulting, a course for novice investors to learn about cryptocurrency, was founded by Spencer Montgomery. Montgomery claims that the easier they make it for you to acquire it, the more the charge that you’re going to be paying. The extra safeguards and insurance that the larger, more well-known exchanges offer can potentially make up for higher rates.
Although they frequently take a cut of your deal, exchange fees might be a predetermined amount. Some exchanges, like Cash App, have variable fees dependent on the volatility of the market. Depending on whether you’re the buyer or the seller, fees are frequently assessed each transaction. Additionally, the costs might vary based on the currencies you trade. Before giving over your money, be sure you know exactly how and when an exchange intends to charge you for your cryptocurrency transactions.
Liquidity
The exchange you pick should have significant transaction volume if you intend to purchase, sell, or trade your cryptocurrency in order to guarantee that your holdings are comparatively liquid and that you may sell them whenever you want. Again, in this case, size may be important. The exchanges with the highest trade volumes are sometimes the ones that are most well-known.
According to Montgomery, you have a better chance of purchasing or disposing of the cryptocurrency you own at the best price when a lot of deals are taking place inside a specific exchange at any one moment. Since cryptocurrency values fluctuate rapidly, using an exchange with low transaction volume may result in you paying more than you would on exchanges with greater trade volumes.
Let’s take a scenario where you decide to purchase Bitcoin when its price drops to below $32,000. If your purchase doesn’t really go through until the price has gone back up, if you’re on an exchange with a low transaction volume, you can actually wind up paying a different amount than you believe.
A cryptocurrency price tracking website called CoinMarketCap continuously monitors the number of trades on the hundreds of active exchanges. At the moment, it counts Binance, Coinbase, and Huobi as the top three exchanges globally in terms of volume.
Coins offered
There are dozens of cryptocurrencies, but not every exchange supports them all.
Any exchange you examine is likely to have a popular coin you’re interested in, such as Bitcoin or Ethereum. However, you might need to do a little more research before choosing younger altcoins, currencies with a little market size, or meme coins.
Just keep in mind that these coins, on top of the already extremely speculative, more established cryptocurrencies, are frequently much riskier bets. Because of this, many professionals advise sticking with well-known currencies like Bitcoin and Ethereum. If you’re thinking about purchasing a cryptocurrency on an exchange, only trade in money you’re willing to lose.
Educational tools
The chance to learn more about various currencies, digital assets, and blockchain technology, according to Ross, is a top consideration for crypto newbies when selecting an exchange.
“What do they do to make sure you’re always being updated in terms of your education?” He enquires.
Through its Coinbase Earn program, for instance, Coinbase compensates users for learning about new coins. Coinbase will provide you with a tiny percentage of the cryptocurrency, which you may subsequently keep or convert to anything else, in return for viewing videos and doing tests about various coins. Others, like Gemini’s Cryptopedia or Binance Academy from Binance, provide online courses and articles to assist you in learning about the crypto markets, past, and present.
Storage
A contentious issue among supporters of cryptocurrencies is storage. Many adhere to the maxim “not your coins, not your keys,” or the idea that you should have the public and private keys connected with your cryptocurrency holdings personally rather than leaving them in your account for the exchange to maintain safekeeping.
However, as a newbie, a nice option would be an exchange that lets you retain your cryptocurrency in your online account. You could decide to retain your cryptocurrency in your own wallet later, once you’ve learned more about storage possibilities or expanded your holdings. Ross, however, advises against using exchangers like PayPal that only let you store on their network.
Recently, Robinhood made the announcement that it will develop a cryptocurrency wallet so users could move their money off-platform.
Ross advises moving your money to a different location whenever you have some experience. If you select an exchange without that option, you could find yourself in a bind if you later decide that you want to move your coins off that exchange—perhaps after learning more about storage choices, you want to retain your holdings in your own cold wallet, for example.
Tax information
Reporting cryptocurrency can make your tax return much more confusing, as if taxes weren’t hard enough anyway. It will be crucial for consumers to ensure that their personal tax status is current as the tax law around crypto assets changes, according to Ross.
Any cryptocurrency trades you make must be reported as capital gains on your tax return. Therefore, you must be aware of the worth of your cryptocurrency both when you buy it with dollars and when you sell it.
A Form 1099-B recording your cost basis, profits, and losses is provided by Robinhood since you can only transact on its platform; this is not the case on other conventional exchanges.
“They don’t offer you that form when you use cryptocurrency exchanges like Binance, Kraken, CoinBase, etc.,” claims Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a provider of tax software for the cryptocurrency industry. This is so that exchanges that let you move your assets off of their platform can’t keep track of every transaction you make in your own wallet or on other exchanges. When consumers need to utilize a program to reconcile their full picture, gather the data, and submit their taxes, that’s when things get complicated.
