The Blockchain Transparency Institute (BTI) in its “December 2018 Exchange Volumes Report” revealed that only two of the top 25 cryptocurrency exchanges accurately report trade volumes. The report shows that as much as 80% of reported trading volume among the top 35 crypto pairs have been subjected to wash trading on the guilty exchanges. The report opened the proverbial Pandora’s box on arguments about why the cryptocurrency is still a Wild West and why more regulation is necessary to infuse some sense of sanity into the market.
Not all cryptocurrency exchanges are bad, engaged in wash trading, or out to mislead unsuspecting cryptocurrency traders and investors. Granted, you might need to take some time to explore the range of options offered by different cryptocurrency exchanges before you choose where you’ll conduct your crypto trading transactions. This piece provides insight into five important questions to ask before you sign up with a cryptocurrency exchange.
1. How many coin pairs can I trade?
If you want to actively trade cryptocurrencies, you’ll need to ask questions about the number of crypto pairs available for trading before you sign up on an exchange. Exchanges will offer trades in Bitcoin and Ethereum by default, but the market still has more than 2000 additional coins, tokens, and altcoins. Of course, you won’t necessarily need to trade all the 2000+ crypto in the market; however, you’ll have a better exposure to the crypto market if you can trade 100 crypto pairs than if your trades are restricted to the top 5 coins alone.
2. What is the volume of liquidity?
Liquidity on a cryptocurrency exchange determines how easy/difficult it will be for you to enter and exit trades. Exchanges with high liquidity tend to have a higher number of buyers and sellers; you’ll enjoy better price discovery for faster transactions. Conversely, low liquidity on an exchange means that it lacks a decent number of buyers and sellers; hence, your orders will take a longer time to be filled and executed. However, you need to be sure that the exchange is posting reliable liquidity numbers so that you don’t base your trading decisions on wash-traded volumes.
3. How secure are my funds here?
When you trade cryptocurrency on an exchange, your private and public keys are with the exchange; and, you really don’t have much control over what happens to your coins. If the exchange is compromised, your coins could be stolen; and it might be a long time before you get any legal respite, if you do get a legal respite at all. You should look out for guarantees showing that the exchange will keep deposits in cold storage. You want to be sure that the exchange offers email encryption and 2-factor authentication to confirm transactions.
4. Can I expect a responsive customer support?
The quality of customer support that an exchange offers could be the difference between profitable crypto trading and unprofitable crypto trading. In some instances, the quality of customer support can enable you to take advantage of unique trading opportunities to proactively set up trades. If the quality of customer support is bad, you can lose money because a trade didn’t go through due to a glitch on your account. You need to be sure that issues on your accounts – deposits, withdrawals, trading orders, transaction verifications – can be quickly resolved so that you don’t waste time, energy, and money unnecessarily.
5. What trading fees can I expect to pay?
The amount of money you pay as trading and transaction fees will ultimately affect your profit margins as a cryptocurrency trader or investor. If you trade regularly, it will be in your best interest to shop around for low transaction trading fees so that you can keep a larger slice of your trading profits. However, you should note that it might be smarter to pay a relatively higher trading fee to trade on a reliable and trustworthy exchange than to pay a lower trading fee on an exchange that could disappear overnight. The most important thing is to ensure that you are getting value for money in relation to the trading fees that you pay.