With the ubiquity of cryptocurrencies, exchanges are springing up every day from different parts of the world. While some of these exchanges are genuine businesses set up by credible people, some others may be fake exchanges just waiting to amass a huge amount of customers’ funds before disappearing into thin air. It’s important for bitcoiners and crypto novices to look out for some vital signs before signing up for any cryptocurrency exchange.
More Exchanges Needed
Blockchain money has witnessed exponential growth in recent years, triggering a somewhat pent-up interest in bitcoin and other cryptocurrencies. Institutional investors and the average Joe all want to join in the action. At some point in 2017, some cryptocurrency exchanges stopped registering new customers, owing to the fact that the influx of new users exceeded their available resources.
While there are over 1500 cryptocurrencies available on the market today, with a combined market capitalization of over $400 billion (at press time), the same cannot be said of digital currency exchanges. In essence, there is still room for more exchanges to startup in the crypto ecosystem.
Don’t Be a Victim of a Scam
Entrepreneurs are always on the lookout for viable businesses they could start and make quick bucks within a relatively short period. The crypto exchange business is such a lucrative venture. However, it requires a lot of effort from its owners to keep it safe from hackers, system error, and other threats.
In recent times, even some of the recognized exchanges have been the target of hackers while some others just turned out to be fraudulent firms.
Here are some questions to ask yourself and red flags to look out for when choosing a crypto exchange.
Is the Platform Reliable?
You need to find out how the exchange you’re interested in trading with behaves during times of high volatility. For instance, when the market is suddenly crashing, and you try to execute a sell order, but the exchange does not respond to your request. The best way to find out if your exchange performs such an annoying act is by scouring the web and social media to see what users are saying about the company.
Dr. Bora Ozkan, assistant professor of finance at Temple University’s Fox School of Business, has said that “What sets apart a mediocre exchange and a good exchange is liquidity.” If an exchange is not reliable, it’s a red flag.
Co-founder of Storj Labs, a blockchain-based cloud storage service, John Quinn, states that “Given the poor regulatory environment, I think that Twitter and Reddit are really the only options to evaluate an exchange’s reputation.”
Is the Exchange Facing Regulatory Threats?
It is important to find out if the exchange has been given a clean bill of health by regulators within its region of operation. For example, the Japanese exchange, Coincheck that got hacked was an unregulated exchange.
Bitstamp is an example of an exchange that has been given the nod by regulators; in 2016, the platform achieved status as a fully regulated payment institution from Luxembourg’s government.
Does the Exchange Strive to Resolve Customer Complaints on time?
Customer service is a big problem for even the best cryptocurrency exchanges, but it is still worth finding out which ones are a bit responsive than the others. If all you see when trying to contact support is the FAQ page, without email or other channels of communication, it is a possible red flag.
Are Their Fees Moderate? Can You Margin Trade?
Fees and margin trading are very important aspects of the game. While some firms would make customers know how much they would be charged per transaction before the trade get executed, some exchanges hide transaction fees. If you cannot find the transaction fee before hitting the submit button, you need to be careful with such an exchange. Also, it is desirable to find out if the exchange has activated SegWit since it reduces transaction fees by a whopping 20 percent and also lowers transaction confirmation times. Bitfinex and Coinbase have recently implemented the upgrade.
Margin trading is a feature not offered by every exchange; some traders may want to use leverage to gain greater exposure to a movement in a particular cryptocurrency. Therefore, you may want to check whether margin trading is supported or not. BitMEX, Kraken and Poloniex are three exchanges that offer this feature.
How Secure is the Exchange?
Search the web to find out stories of hack relating to the exchange. If they have been hacked before, it’s possible they could get hacked again except if they have upgraded their systems.
Another factor to consider is if the exchange has other layers of user authentication during login.
For example, some exchanges would need you to enter a fresh code from your 2FA app each time you try to use the site. And if you try signing in with an IP address that’s different from your regular address, you might be required to carry out other verification tasks before you would be let in. “The more mainstream cryptocurrencies become, the more investors expect the same level of security from these enterprises as they are accustomed to from their banks and brokers,” Ozkan said.
The Best Bet
Experienced crypto investors understand that in the world of blockchain money, anything can happen as nothing is guaranteed. Roman Sobachevsky, managing partner at GVA Capital and early crypto investor, stated:
“To minimize your risks, try not to put your money in a single exchange, and don’t store money on exchanges. Transfer money to an exchange when you need to do a trade. Trade, then get the money back.”
It is also useful to have accounts on several different exchanges to gain exposure to different altcoins. For instance, while Bitstamp is regulated and reliable, they only offer a limited selection of cryptocurrencies. Other exchanges, like Bittrex and Poloniex, offer a wider variety of altcoins.
You’ve read it all! In the world of bitcoin and altcoins, there are no guarantees. Therefore the best bet is never putting all your eggs in one basket and above all, never invest more than you can afford to lose.