More people are learning about and embracing cryptocurrency, but not as many know about crypto exchanges. You need a crypto exchange to buy and sell cryptocurrencies like Dogecoin, Ethereum and Bitcoin. A crypto exchange works a lot like a brokerage platform that is something you may be more familiar with. Each one of them gives you a portal to make different order types to sell, speculate on and buy digital currencies. Such an exchange can either be centralized or decentralized. Centralized crypto exchanges are managed by one authority – the way a brokerage firm would facilitate their trades. A decentralized crypto exchange, on the other hand, distributes verification powers to people who are willing to join the platform and certify transactions – it works like the blockchain.
There have been many discussions about how decentralization in crypto exchanges may increase transparency and accountability, but arguments can also be made for centralizing the exchange. Decentralization, though, helps to keep things running well in case something happens to the company running the exchange. In the typical exchange, to by digital currencies, you have to create an account. You may need to get a crypto wallet to keep your cryptocurrency if the exchange you pick does not provide one. We will talk about what to look for when picking a crypto exchange, but be careful when doing so. Some wallets do not allow you to move coins off the platform which may create security risks incase the platform is hacked or has tax issues. You would have to sell your coins and buy them again.
After picking an exchange, you can buy digital currencies using US dollars or any other currency that the exchange allows. You simply transfer your fiat through wire transfer or ACH. Some exchanges even allow you to buy crypto using a debit or credit card although this often has attached fees. Some of those extra fees tend to be too high – about 5% of your total transaction. Some other exchanges will allow you to use other digital currencies or even their own branded coins to fund a transaction. As a side note, you can save for retirement using Bitcoin IRA. Cool, right?
Choosing the right exchange
Exchanges will all have different requirements depending on the type of digital currency you want to acquire. In some cases, you can buy fractional shares of the coins for a small amount of money. Be sure to check the requirements for the coins you want to buy. But before that, you have to have settled on a crypto exchange. How do you do that? How do you compare your options to make a good financial decision? Below are six questions to answer to determine the best exchange for you. Always remember that digital currencies are speculative. You should only invest if you are willing to deal with the crazy price swings and the risk of losing everything.
- Is it reputable?
Picking a crypto exchange can be extremely complicated. You have to consider features like the security, fees and whether or not they list any of the assets you want to buy. But before you consider all that, ask yourself whether the exchange you are considering is reputable. You want an exchange that is verifiably secure and that has been known to help the uninitiated to learn how to invest in digital currencies. As digital currencies grow more popular, the market is becoming a target for hackers. Many leading exchanges have been hacked recently, to the tune of millions of dollars. Often, the exchanges will reimburse people whose coins are stolen using insurance money, but you do not want to find yourself there, in the first place. Invest your money only in a reputable exchange.
- Does it support cold wallets?
One of the ways to minimize risk for your investments is to spread your purchases across different exchanges. You can also move your assets off the default wallet offered by your exchange. As such, you need an exchange that supports cold wallets. Cold wallets are wallets that are not connected to the internet, making them harder to hack. The only downside is that you will need to remember your passcode, otherwise you lose access to your assets forever. As you consider this, find out the withdrawal fees attached to moving your crypto off the exchange. They will vary by the type of coin, but ask yourself if they are sensible.
- What cryptocurrencies can you trade?
As you narrow down your list of exchanges, consider the digital currencies available on each. You may be comfortable with using an exchange that supports only one coin if that is the only coin you are interested in. If, on the other hand, you are savvy, you want an exchange that gives you access to all the available options like …
- How popular is the exchange?
Still, the availability of many coins alone is not enough. If there are no trades happening inside of the market, you have shot yourself in the foot. Ideally, you want to see millions of dollars of treading happening in the exchange. This will assure you that once you are in, you will have liquidity which means that you will be able to trade your money and your coins whenever you need or want to. Besides, low-trading markets end up laying the cost of sales on you. If the volume is low, whenever you put an order, there will be slippage. Slippage is a term to describe a situation where you buy an asset at lower or higher than you want. High volume ensures that you can trade without influencing the price of those coins. You can use sites such as Hardbacon to compare between different exchanges.
- Does it offer trading types?
As you become more advanced in crypto trading, you will prefer a crypto exchange that provides trading types such as limit orders, which prevent slippage by putting a cap. Consider the margin offered by the exchange. Bear in mind that trade types are still evolving so different exchanges will offer different varieties with time.
- How easy is it to use and at what cost?
If you are new to trading cryptocurrencies, make sure you pick a platform that is easy to use and one that will provide you educational resources that can hold your hand until you understand what you are doing. Do not forget to consider the fees. You may be happy to pay premium for the platform when you are learning, but the higher the fees, the lesser your eventual returns will be. People trading at high frequencies especially want lower fees.
To open an exchange account, visit the exchange’s website or get the app. Do not forget to check if it is available in your country. In fact, some exchanges may even be limited in your state, so do not take the fact that you can access the website as proof that you can use the exchange. Many federal and state governments are still trying to understand how to treat digital currencies from a tax and legal standpoint.