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Here’s What to Look for In a Crypto Exchange

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CoinEgg, CoinEgg and Gemini are not mythical creatures. Binance is the Internet’s newest buzzword. These are all cryptocurrency exchanges. They’re digital marketplaces that allow you to trade and buy crypto.

You cannot buy cryptocurrency from any bank or investing company. Once you decide to buy Bitcoin, Ethereum, or other cryptocurrency, you need to set up an account with a crypto trading platform. This allows you to convert your U.S. currency (or any other currency) into digital assets.

Coinbase is one such example. They have been around since Bitcoin’s inception. There was less oversight of how the crypto was being bought, sold and traded. Robinhood and PayPal have been around longer and are well-known for offering other services. However, they recently made it possible to trade crypto within existing accounts.

Here are some things you should know before choosing a crypto exchange.

A crypto exchange allows you to buy and sell cryptocurrency. An exchange allows you to trade one cryptocurrency for another, such as Bitcoin to Litecoin. You can also use an exchange to buy crypto using regular currency like the U.S. Dollar. Exchanges are updated to reflect the current market prices of the cryptos they offer. If you need to convert cryptocurrency back into U.S. Dollars or another currency, an exchange will allow you to withdraw cash to your regular account.

Tyrone Ross is a financial advisor who runs Onramp Invest. This crypto investment platform allows financial advisors to choose the best crypto exchange. Instead, Ross suggests that you evaluate your interests and choose an exchange that suits your goals. Perhaps you are looking for a specific cryptocurrency or would like to learn more as you invest in crypto.

“Am I searching for something like Casa because Casa does a lot and I don’t need to worry about a secret and public key?” Or am I going to Gemini to get the weird coin I’m looking for and they’ll let you buy it? Or, am I going to Coinbase to get these awesome tools that will allow me to learn crypto and earn it?
What to Look For in an Exchange

Because of state or national regulations, you may not be able to buy and sell crypto on certain exchanges because of your geographic location. China is one example of a country that has banned its citizens from accessing crypto-exchanges.

The United States has a lot to worry about when it comes to cryptocurrency regulation. Some states have their own rules. New York for instance requires cryptocurrency exchanges to get a BitLicense to allow them to operate within its borders. Only licensed companies can offer certain approved coins. Although most states don’t have as strict regulations as New York, others have them or are making efforts to. According to the National Conference of State Legislators (NCSL), 31 states have digital currency legislation in their 2021 legislative sessions.

You will often find information on the geographical limitations of an exchange, as well as other accessibility factors such as national currencies accepted, on the exchange’s website or in its terms of service.

The central institutions that don’t back cryptocurrency are not able to protect your holdings. Coinbase and Gemini have U.S.-based exchanges that keep your balances. Dollars you keep with them in FDIC insurance-insured bank account accounts. FDIC insurance is not available for cryptocurrency balances.

Some exchanges have insurance policies in place to protect you crypto from hackers and fraud. Coinbase, for instance, has an insurance policy of $255 millions. This means that account holders are protected in the event that Coinbase’s reserves are hacked or any crypto amount above $255 million is taken. Kraken is one example of another company that relies on its security procedures to protect clients, rather than insurance policies.

You can keep your crypto holdings in an exchange, or move them into your own wallet for a shorter time. However, security of the exchange should always be your top priority. You can check to see how many of the assets that exchange has offline and in hard storage.

This is especially important as cryptocurrencies grow in value. More value equals more potential targets for thieves. In 2020, there were 28 attacks against crypto exchanges. The largest resulted from more than $200 million worth of cryptocurrency assets being stolen from KuCoin in Singapore.

Take a look at how much of the exchange’s assets it keeps offline. Although exchanges must keep some crypto active in order to facilitate trades it is sensible to keep most of the holdings offline or in cold storage. It’s also more difficult to hacker access. Coinbase for instance claims it keeps 98% of customers’ funds offline and only 2% is active traded. Combining this storage with its $255 Million insurance policy gives more reason to trust that your crypto assets are safe in the event of a hack.

You may also be able to search online for security measures, such two-factor authentication. In other words, your username, password, and additional methods to verify identity will be required. For example, you may need to enter a code that you receive via text message each time you log in.

It is possible to feel more secure sticking with well-known exchanges with a large customer base. Doing business with smaller, less established exchanges may pose a greater risk if they don’t clearly state their security procedures and offerings online.

Douglas Boneparth (a financial advisor and president at Bone Fide Wealth in New York) says that “size matters here.” He points to Coinbase which recently went public on Nasdaq’s stock exchange. While there are pros and disadvantages to this, it allows you to see the financial health of the company. That’s crucial when you’re considering using an exchange or investing in any company, product, or service.

Fees are an important consideration. However, you should not let a high-fee structure discourage you from using an exchange. Spencer Montgomery, founder Uinta Crypto Consulting, says that the fees charged by exchanges are higher if it’s easier to buy the product. This is a program designed for new investors who want to learn more about crypto. High fees are sometimes a good tradeoff for the extra protections and insurance provided by more popular exchanges.

While exchange fees are not a fixed price, they can often be a percentage. Cash App and other exchanges charge fluctuating fees that are based on price volatility. Fees are usually charged per transaction. They can vary depending on whether the seller is the buyer or the seller. There might be additional fees depending on what currency you trade. Before paying any cash, be sure to understand the exact fees that an exchange may charge for your crypto transactions.

The exchange you choose to trade crypto should have sufficient trade volume so that you can trade them whenever you wish. Here again, size is important. Of course, the most popular exchanges also have the largest trade volumes.

Montgomery says that when there are many trades taking place on an exchange, you have a greater chance of buying or selling crypto at the highest price. Because crypto prices change very rapidly, you might end up paying more if your exchange has a smaller trade volume than other popular ones. Imagine that Bitcoin’s price falls below $32,000 and you decide to buy it. A low-trade volume exchange may mean that you might end up paying a higher price than you thought. If your purchase isn’t completed until the price moves back up, it could be a sign that you are not getting paid.

CoinMarketCap, which is a price-tracking platform for cryptocurrency, continuously monitors the trade volume of hundreds exchanges. It currently lists Binance, Coinbase and Huobi among the top global exchanges in volume.
Offering coins

Each of the thousands available cryptocurrencies is not offered by every exchange.

It’s possible to find popular coins such as Bitcoin or Ethereum on any of the exchanges you are considering. However, you may need to do some research on newer altcoins and coins with a smaller market cap or meme coins.

Keep in mind that these coins are more risky than the more established, highly speculative cryptocurrencies. Experts recommend sticking to the major names such as Ethereum and Bitcoin. When buying any crypto coin, be sure to only trade it in cash values you can afford to lose.
Educational tools

Ross says that learning more about cryptocurrency, digital assets, and the blockchain technology is a top priority for beginners in crypto.

“What are they doing to ensure that you’re always up-to-date from an education standpoint?” he inquires.

Coinbase’s Coinbase Earn program offers rewards for learning new coins. Coinbase will give you a small amount of crypto in exchange for you watching videos and answering quizzes about coins. This can be used to hold or convert the crypto to another coin. Other courses and articles are available on Coinbase to help you learn more about crypto markets and history.

For cryptocurrency enthusiasts, storage can cause divisions. Many crypto enthusiasts believe that storage can be a contentious topic.

A crypto exchange that allows users to store their crypto online can be a great choice for beginners. Once you learn more about storage options, or increase your holdings, you might decide to keep your crypto within your own wallet. Ross warns against any exchanges that restrict you from storing your crypto on their platform. Robinhood announced recently that it would be creating a crypto wallet for you to send your coins off-platform.

Ross says, “Once your knowledge increases, you may be able to move your coins to another place.” If you decide that you would like to move your coins from that exchange, perhaps after learning more about storage options that you prefer to keep your money in your cold wallet, you might find yourself stuck with an exchange that does not offer that option.
Tax information

Taxes are already complex enough. Reporting cryptocurrency can add an additional layer to your tax return. Ross says that crypto assets will change the tax environment, and it’s important for people to ensure that their personal tax situation remains up to date.

All crypto trades must be reported on your tax return as capital gains. You will need to know the exact value of your crypto currency when you purchase it, and its value when you sell it.

Robinhood is the only platform that allows you transact. It provides a Form 10099-B to track your cost basis and any gains or losses. However, this is not the case with other exchanges.

“When you use cryptocurrency trading platforms like Binance, Kraken or CoinBase, they don’t give that form to you,” Shehan Chandrasekera (CPA), head of tax strategy for A crypto tax software company. This is because exchanges that allow users to transfer their holdings from their platform don’t have the ability to track your personal wallet and trades made on other exchanges. This is when things get complicated and users will need to use a tool in order to reconcile all their accounts, obtain the data and file their taxes.
Bottom Line

Boneparth suggests that there are many other factors to consider, depending on your preferences. For example, customer service, how the platform’s mobile application is, and how easy it is overall. However, experts say it is important to take the time to understand crypto before investing.

You should think about what security measures and fees you are comfortable with. What additional steps will you take to store your coin? And your goals.

Boneparth believes that you should spend more time studying the area. “You are putting your money at risk in a wild environment. It’s one to randomly put money in stable markets; it’s another to risk your money by throwing money into volatile markets. You should be well-informed, especially if you are dealing with volatile assets.