Cryptocurrency Exchange
Cryptocurrency exchanges are platforms that facilitate the trading of cryptocurrencies for other assets, including digital and fiat currencies. In effect, cryptocurrency exchanges act as an intermediary between a buyer and a seller and make money through commissions and transaction fees.
Like stock exchanges, crypto traders can buy, sell, and convert cryptocurrencies on crypto exchanges. There are currently three types of cryptocurrency exchanges—centralized exchanges (CEXs), decentralized exchanges (DEX) and hybrid exchanges (HEX).
Blockchain is being adopted faster than any technology in the history of the world and almost everyone is eager to jump on the bandwagon. But before getting involved in the complex world of crypto trading, it is crucial to keep a few things in mind. For instance, it is important to choose the right crypto exchange that suits all your needs in terms of ease of operation, and transaction fees.
While most trading currently happens on centralized exchanges such as Binance and Coinbase, the rise of decentralized finance (DeFi) and related applications (dApps) on blockchains like Ethereum has fueled the development of decentralized exchanges. Some popular decentralized exchanges like Uniswap, Pancakeswap, and Compound are being used more and more.
Centralized exchanges are controlled and regulated. In order to begin using a centralized exchange you must first complete a KYC or know your customer procedure. This involves providing a government issued identification and could require certain documents to confirm your identity and source of wealth.
Centralized exchanges are the most common types of cryptocurrency exchanges and usually have the simple processes and easy-to-use application. A central entity governs them, typically the owner of the exchange. In centralized exchanges, every order is recorded and validated by the company to ensure security and correctness. These exchanges usually offer both crypto-to-crypto trading and use of funds via your bank account or credit card to trade cryptos.
Customer support is one of the important features that most centralized exchanges offer. This is particularly beneficial for those taking their first steps in crypto trading.
A decentralized exchange as the name suggests is truly decentralized. This means there is no central oversight or no company or institution governing these exchanges. The trades on decentralized exchange are automated and executed via smart contracts and decentralized applications based on certain pre-defined metrics. Most decentralized exchanges currently operate on Ethereum blockchain.
The top five Cryptocurrency Exchanges (as of July 2022) are as follows:
- Coinbase
- Crypto.com
- BlockFi
- Binance.US Cryptocurrency Exchange
- Bisq Cryptocurrency Exchange
These cryptocurrency exchanges have different pros and cons. Learning how they work and what you need is important to consider as you pick an exchange. Some provide specialized financial products, while exchanges offer competitive prices or speed in transactions.
Coinbase
Coinbase is considered one of the best crypto exchanges, especially for those new to cryptocurrencies. It is easy to use and is one of the largest and well-known exchanges in the United States. It debuted on the public market last year, helping cryptocurrency exchanges be seen with more legitimacy. Coinbase has a straightforward onboarding platform that makes managing different cryptocurrencies an easy experience. It explains things simply.
Coinbase also has comprehensive learning materials that teaches users more about cryptocurrencies, blockchains, security features, and more. A great choice for beginners to cryptocurrencies, Coinbase is user-friendly, offers a wide selection of cryptocurrencies, and a wide variety of educational materials.
Crypto.com
This exchange is ranked first in Cybersecurity Rankings. It is considered one of the best because of the protection it offers against cryptocurrency fraud and cyberattacks. It employs various techniques to keep assets safe using multi-factor identification verification.
Crypto.com also offers the largest selection of currencies among all the companies of the top five, with over 250 cryptocurrencies. It also features a non-custodial DeFi wallet – which allows users to send cryptocurrency at their own speed and earn interest on tokens along with prepaid visa cards to use to spend earned crypto. They also offer crypto loans.
BlockFi
BlockFi is known as one of the best cryptocurrency exchanges for earning interest. Not only does it allow users to earn interest on their cryptocurrency, it also allows users to borrow money using Bitcoin as collateral.
Most cryptocurrency exchanges offer discounts and bonuses for high-volume trading. BlockFi creates financial products that cater to those more conservative in trading. It offers monthly compounding interest to those who investors who store their assets in their accounts on this platform. It also features a strong cybersecurity infrastructure. Earning monthly interest payments on cryptocurrencies with no monthly account or commission taken, makes this U.S. based and regulated exchange the best for earning interest.
Binance.US Cryptocurrency Exchange
Binance.US is known as one the best cryptocurrency exchanges due to low fees and one of the most generous fee structures across all trading platforms. Binance is known as the largest global cryptocurrency exchange by trading volume, and Binance.US is the domestic counterpart.
For those who want to buy cryptocurrency directly, you can do so directly with USD, saving money in conversion fees. Binance.US features a comprehensive market dashboard, margin trading, and advanced trading and data graphs.
(It is not available in Hawaii, Idaho, Louisiana, New York, Texas, and Vermont.)
Bisq Cryptocurrency Exchange
Bisq, formally known as Bitsquare, has a vast coin support of centralized exchanges to a decentralized environment. It is built on open-source software meaning its design is publicly available, and the project is funded by personal savings and donations from its community of users without limiting currency support. It is known as the best decentralized exchange because of this structure.
Bisq supports many digital assets and fiat currency offering an excellent alternative for trading altcoins like Cardano, SRP, and Dogecoin. Bisq also has enhanced security features that ensures that the parties trading act honestly and have complete control over their funds during the trading process. A short verification process and a wide variety of payment methods also makes Bisq one of the top cryptocurrency exchanges.
7 Key Factors to Help You Choose a Crypto Exchange
Trading cryptocurrency can be complicated. You can make your life a lot easier by using a crypto exchange. There are a number of exchange platforms to choose from. Be sure to do your research before selecting an exchange.
When cryptocurrencies first appeared, early adopters acquired coins through mining or by swapping them in online forums. But unless you have lots of time and technical expertise, you will likely want something more convenient.
Crypto exchanges are businesses that store crypto assets and match you with other buyers and sellers, making it possible to trade crypto much like you would trade stocks in a brokerage account.
1. Trading Limitations
With crypto’s surging popularity, there are now as many as 10,000 different coins to choose from. No exchange offers every digital asset, so make sure yours provides the ones you want. Think about whether you are mostly interested in bitcoin, ether and the handful of leading DeFi tokens that help drive smart contracts or want a simpler or more complicated menu.
A great starting place are large, well-known exchanges like Coinbase and Kraken, which offer a wide array of coins and tokens that can accommodate most investors, from beginners to active traders. Coinbase lets you trade more than 450 coins and Kraken offers more than 160 coins including so-called meme coins like dogecoin and Shiba Inu coin.
For the crypto obsessive, there are exchanges, often based overseas, that let you trade dozens of obscure coins. One note of caution: These don’t always follow U.S. laws or offer the same level of investor regulations that you might expect from, say, a U.S. stock trading platform.
If you want to mostly trade stocks along with a few prominent coins such as bitcoin cash, ether and dogecoin, consider Robinhood, the well-known stock-trading app, which lets you trade a handful of coins commission-free.
2. Make sure there’s sufficient liquidity
It’s important to find an exchange with liquidity—the ability to easily turn your cash into coins, or vice versa—without paying a big markup. That’s especially true because prices move fast in the world of digital assets. When the price of a coin you want to buy is rocketing to the moon, you’ll want to know your buy order is filled quickly and at a price close to the one you see quoted on your screen.
The quickest way to get a handle on this is to look at an exchange’s trading volume: the higher, the better. Resources such as crypto information website CoinMarketCap provide the 24-hour trading volume for hundreds of exchanges. Coinbase and Kraken recently have shown the highest trading volume.
In addition, you’ll want to look for an exchange that’s well-established, with at least a five-year track record, and one that also takes steps to prove it truly possesses the assets it claims to hold on your behalf.
3. Compare the fees
Unlike your brokerage accounts at Schwab or Fidelity where you can now trade stocks, bonds and ETFs for free, there’s no free lunch with crypto exchanges. In fact, crypto exchanges typically charge a fee every time you deposit, trade or make a withdrawal. Fees range from 0% to 5% per trade, depending on your payment method and the type of transaction. Fee tiers are typically based on your total trading volume over a 30-day trading period, and the percentage you pay generally falls as the size of your trades increases. For example, if you traded $1,000 worth of tokens 15 times in a month on Bitstamp, fees would amount to $75. But if you made a single trade of $20,000, the fee would be only $50.
Fees at some major U.S. exchanges:
FTX US: 0% to 0.4%
Coinbase: 0.5% to 4.5%; varies by type of transaction
Kraken: 0.9% to 2 %; varies by type of transaction
Crypto.com: 0% to 2.99%; varies by type of transaction
BlockFi: 0%; spread of 1%
Binance.US: 0.1% to 5%; depending on payment method
Bitstamp: 0% to 0.5%
4. Ensure there’s enough security
It’s no secret crypto exchanges are vulnerable to hacks: Mt. Gox, one of the most prominent early exchanges, collapsed after $460 million in customer assets were stolen in 2014. As recently as last December, exchange BitMart was hit for $150 million. (BitMart has said it will reimburse investors.) So it’s common sense to avoid putting money into a crypto exchange with a significant history of cyberattacks or theft.
Most crypto exchanges offer basic protections like two-factor authentication, typically using apps like Google Authenticator or Authy to build a line of defense against phishing scams or other crypto theft. But you can also be on the lookout for additional measures. For example, Crypto.com’s Exchange mobile app supports biometric login, which uses facial and fingerprint identification on your smartphone to verify your identity.
To further augment security and ward off imposters, major exchanges such as Kraken and Gemini require you to provide U.S. government-issued identification such as a passport or driver’s license when you open a new account. They also have additional layers of codes that need to be authenticated when you buy or sell, when you change funding levels, or if you make major account changes, like freezing your account, that require a master password.
5. Consider the controls
Stock exchanges like the New York Stock Exchange are heavily regulated. By comparison, crypto exchanges are the Wild West. One reason is that while the NYSE has been around for hundreds of years, crypto is barely more than a decade old. Another is that Washington is still arguing about the
right way to oversee the crypto universe, with agencies like the Securities and Exchange Commission and Commodities Futures Trading Commission still vying for primacy.
Until the dust settles in Washington, it’s best to look for an exchange that already has security controls and financial audits in place. At the very least, any exchange you work with should be able to show it has audited Service Organization Control reports. SOC 1 confirms that the exchange’s financial operations and reporting controls are well designed and functional, while SOC 2 certifies that the technology systems driving an exchange’s security, processing integrity, network availability and confidentiality controls are in proper working order.
Unfortunately, these reports aren’t always easy to find on exchanges’ websites. Exchanges may send out press releases when they complete SOC 1 and 2 examinations, as Coinbase did with auditor Grant Thornton in 2020 and Gemini did with Deloitte in 2021. But if you can’t find evidence of these reports online, it’s worth calling the customer service department.
Some U.S. states have been proactive on the regulatory front, hoping to protect consumers. For example, exchanges such as Gemini, Coinbase and Bitstamp have a Bitlicense issued by the New York State Department of Financial Services, which verifies that stringent business controls are in place.
6. Vet the insurance policy
Digital security that will prevent hackers from stealing customer assets should always be priority No. 1 for a crypto exchange. But the good ones will still have a healthy insurance policy just in case.
Many exchanges now carry commercial crime insurance which typically covers acts of dishonesty, theft, robbery, destruction or cyberfraud. For example, Gemini says it maintains $290 million in digital-asset insurance for specific losses. Still, insurance varies widely across exchanges, so it’s important to check what they cover. You can do so in the user agreement you are given when you sign up, and also frequently in the FAQ sections on exchange websites.
Another important ask: Make sure any exchange offers Federal Deposit Insurance Corp. protection for your cash. Chances are your crypto trading account won’t just hold coins. You’ll also have to keep some deposits in U.S. dollars, as you move money into and out of crypto markets. Exchanges should keep this money in a custodial account at an FDIC-insured bank, which will protect you on deposits of up to $250,000 in the unlikely event of a bank failure. Most major exchanges offer this level of protection, but not all do.
7. Get a handle on the tax reporting
If you make money trading crypto, the IRS wants to know about it. In fact, cryptocurrency trading profits are taxed just like profits you might earn trading stocks and bonds. Unfortunately, reporting this information to the IRS is a lot more complicated.
Come tax time, you should look out for K-1, 1099-MISC or IRS Form 8949 Schedule D statements from digital-asset providers. These detail your profits and losses for the year and are equivalent to the Form 1099s sent by a stockbroker. The problem is some crypto exchanges (especially ones based in foreign jurisdictions) do not send these forms. And when forms do arrive, they may only appear after the April tax deadline. (In that case, be prepared to file for an extension.)
If tax reporting is important to you when shopping for a new exchange, search “crypto taxes” on its website or contact customer service to ask when and if tax forms will be sent to you. For example, if you earned more than $600 in crypto income during the year, Gemini will issue you a Form 1099-MISC. You can also download your Form 1099-MISC (or confirm you did not receive one) in the “Statements and History” section on the “Account” page on the Gemini website or mobile app.
