Whether you’re a trader or a long-term investor, the exchange you use to manage your Bitcoin matters significantly.
The task of choosing a reliable Bitcoin exchange might be particularly challenging for those who are new to cryptocurrency, as it is still difficult for them to understand the concept behind Bitcoin as well as the many differences between standard debt or equity investments and the more risky cryptocurrency investments. Here is what you need to base the decision on.
Security is Key
Perhaps the most important factor to consider is the security systems of your potential trading platform. The return you make on your investment means little if you lose all the money in a hack or if your account is compromised.
The problem with big exchanges is they act as honeypots for hackers. Bitcoin’s actual protocol has proven to be impregnable so far, but the exchanges have not. Exchanges like Mt. Gox had massive amounts ($460 Million) of Bitcoin stolen in 2013, and that did not inspire a lot of faith in the industry.
However, this could conceivably happen to any of the exchanges you choose to buy your cryptocurrency through. Best practices say to not keep your crypto stored within the exchange, and instead move it to your own private wallet. But if you are a trader, this won’t be entirely possible. The solution to this is to look for exchanges with good reputation for security as well as strong measures on the customer side. 2-factor authentication at the very least is something you should require of your exchange.
If you’ve ever had issues with your regular investment account or a credit card/bank account, then you know how frustrating it can be to deal with customer service at banks. Exchanges are no different, and the long wait times and poor language skills of the customer service can become a real problem when you have an unregulated industry and such volatile prices.
You want fast solutions so that you can carry on with your business while some exchanges keep trading costs low by cutting costs on the customer service end. Researching ahead of time can help save you a massive headache in this regard. Know what to expect so you aren’t surprised the first time you have an issue with your account and it takes days to resolve.
Leverage and Liquidity
Some exchanges work to connect buyers and sellers within their platform, which results in the limited liquidity in the market for those cryptocurrencies that already have a very small market capitalization. As a rule, if you use bigger exchanges, you get higher liquidity for a particular trading pair. But there are smaller platforms that have much lower liquidity and will experience higher price action as a result of aggressive trading.
It is unlikely this will be a problem for many of you, but it helps to understand the market dynamics at play and is another reason why you should open accounts on two different exchanges. The price action won’t always be the same on each market. As a result, there are sometimes arbitrage plays available. The bigger reason liquidity matters is it will factor into the cost of trading on the platform you have chosen, and cost will likely be your biggest concern if you are a rookie trader.
There are some fees that are mandatory transaction costs when you use Bitcoin, but there are also discretionary fees that are charged by the exchange. The more you reduce these, the more margin for error you have factored into your ability to make a profit.
Depending on how much you are planning to trade, a large consideration will come with the size of the platform and the leverage they are willing to provide. When you have aggressive leverage as a factor, the results are much more unpredictable, which means only certain exchanges will make these options available. Your decision regarding exchanges may depend on what leverage options the exchange provides as well as options/futures trading (for the more advanced).
Another helpful factor to monitor is how many cryptocurrencies the exchange currently hosts. Rather than putting all your money into Bitcoin, it might make more sense to diversify out across the field. Generally, exchanges tend to have more than just Bitcoin (usually the other cryptocurrencies are included based on their market capitalization).
Centralization is Double-Edged
Thinking more philosophically and focusing on the bigger picture, it helps to consider which exchanges are centralized. Most exchanges are run by centralized entities, which is generally a good thing, but does stray from the original spirit of Bitcoin. In the short-term, this means lower trading fees and high liquidity, but as the industry progresses to have more decentralized exchanges in action, the market will change.
Decentralized exchanges will start with higher fees that will eventually come down, but until that point, the main advantages will be the lack of censorship on your funds. These exchanges will have less of a problem with human error or management.
Hedge Your Bets
Maybe the best advice you can get is to sign up for two exchanges. This will protect you in case you have issues with another, and you can also compare the prices to see if there are discrepancies. This is not unheard of, especially when there are rapid changes in the market.
Going back to the issue of security, it also makes sense from an investment standpoint to have money in several different exchanges. Diversification is logical on many different levels, and by taking this into account, you can save yourself a lot of pain.
Split testing is a standard marketing practice which helps you try multiple options at once and then choose the best option based on your conclusions. If you split test a few exchanges for cost and service, you will be the best off among the majority of traders in the long-term.