If you want to buy or sell cryptocurrencies, you will surely need to open an account with a cryptocurrency exchange. There are a couple of alternative options, such as cryptocurrency ATMs, that you can pay cash into and receive cryptocurrencies in exchange. They are usually restricted to just bitcoin and won’t be conveniently located for the most part. Other than rare exceptions, cryptocurrencies are bought and sold via online exchanges.
With over 200 cryptocurrency exchanges currently open for business, how do you choose just one? Even if you filter cryptocurrency exchanges down to the biggest and most well-known, or those with the best reputation, your choice will still be well into the double digits. But there are another set of filters around your particular needs and preferences that can further narrow the choice down. We’ll lay out the main factors to consider here and by the time you boil it down to just the exchanges that perform best across those qualities, your choice should be far less daunting.
But before we get to that let’s quickly explain exactly what a cryptocurrency exchange is and why you need to use one to buy and sell cryptos.
Regardless of your experience level in investing and trading you’ll almost certainly know what a stock exchange is. It’s a service that facilitates the trade of equity or stock, issued by publically listed companies. It basically matches buyers and sellers, processes a trade between the two sides, makes sure the seller is the rightful owner, and receives the current market price from the buyer of their stock. A stock exchange also publishes the changing market price of a particular asset, based on supply and demand at that particular moment in time, so buyers and sellers can choose the moment to make a transaction.
In the past a stock exchange managed this trade manually with brokers bidding on the exchange floor on behalf of clients and the exchange, then completing the paper work and maintaining records. Nowadays it’s all done through electronic systems and buy and sell requests are made online through digital interfaces. Exchanges are not just for stocks and shares buy any kind of fungible financial asset. Fungible means one unit of a particular financial instrument is the same as any other and completely interchangeable.
Exchanges specialised in the exchange of other assets, such as commodities like oil or gold or futures (which are instruments based on expectations of the future price of an asset) also exist. And of course, cryptocurrency exchanges are specialised in facilitating cryptocurrency transactions.
Like any other exchange, a cryptocurrency exchange makes money by charging buyers and sellers either a commission or a spread. A spread is a difference between the buying and selling price of the same asset traded via an exchange. That difference is the exchange’s fee.
Back to the differentiating qualities that vary between exchanges and will help you choose which is the most appropriate for you to open an account with:
The first quality to look for in a cryptocurrency exchange is whether or not you can pay fiat currencies into your account and use them to buy cryptocurrencies. Because financial services regulators have more strict requirements for companies that accept traditional money (fiat currencies are the currencies we use in our respective countries day-to-day, such as euros, dollars or pounds), not all cryptocurrencies allow this. Some only allow you to trade cryptocurrencies for other cryptocurrencies.
A cryptocurrency exchange that only works with cryptocurrencies might be fine for you if you already own cryptocurrencies and just want to exchange one kind for another. But if you want to buy your first cryptocurrency or more without trading in those you already hold, it is not going to help you. You’ll need a cryptocurrency exchange that allows you to pay in fiat money and use it to buy cryptocurrencies or if you want to cash out all our part of your cryptocurrency holdings, that would also be necessary.
Only this kind of exchange would mean you can convert cryptocurrencies into fiat currency and transfer out of your exchange account into your bank account or an online wallet service like PayPal or Stripe.
Which brings us to the next quality you should look for in a cryptocurrency exchange. Even exchanges which accept fiat payments and process payment withdrawals won’t necessarily process those withdrawals to wherever you might want them to go. Some will make transfers to your bank and some wont, working only with e-payment providers. Different cryptocurrency exchanges work with different e-payment providers. You will have to check that deposits and withdrawals to and from your chosen cryptocurrency exchange will work with your preferred methods. Also, check your bank or e-wallet host will accept payments to and from your preferred exchange.
Not all cryptocurrency exchanges support the same choice of cryptocurrencies. Many only offer the most popular while other support a huge range including ICO tokens and more obscure or newer cryptocurrencies. Check which are supported by crypto exchanges you are considering and if that covers the cryptocurrencies you want to trade now or may want to trade in the future.
The commission, spread, or both charged by different cryptocurrencies, will also vary between currencies. Make sure to check they are competitive for those you see yourself trading with. Also, check for any other fees that may be charged. Such as, withdrawals or converting your cryptocurrency holdings into fiat currency before a withdrawal.
Cryptocurrency exchanges also have varying volumes of trades taking place on them and for different cryptocurrencies. The amount of trade volume taking place on an exchange is called liquidity. High trade volumes, or high liquidity, is important as it means there will always or almost always be someone else to buy cryptocurrencies. You want to sell at the current market price, or sell those you want to buy. This is particularly important at peak times of the market when lots of traders want to buy or sell, which is usually when prices are moving sharply up or down.
Finally, you want your cryptocurrency trading experience to be a safe and convenient one. Unfortunately, it is not rare for cryptocurrency exchanges to be hacked and coins stolen from the accounts of clients. So make sure you carefully read what cyber security measures an exchange has in place, what experts think of them, and the exchange’s security history.
Also read reviews on customer service and check the communication options available, such as telephone, chat, and email. If you do need to speak to customer service, you want them to be easy to get in touch with, quick to respond, and helpful.