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We’re not talking here about mythical creatures, or the latest buzzword on the Internet. These are all cryptocurrency marketplaces, digital places where you can trade and buy crypto.
It is not possible to buy crypto directly from your bank or investment firm. Once you have decided to purchase Bitcoin, Ethereum or any other cryptocurrency, you will need to open an account on a crypto trading platform in order to trade your U.S. Dollars (or any other currency) for digital assets.
Coinbase is one of the oldest companies, having been around since the dawn of Bitcoin. This was before there was much more oversight over how crypto was traded, bought and sold. Robinhood and PayPal are more well-known for their other services and recently permitted customers to trade cryptocurrency within their existing accounts.
Here are the facts about choosing the right cryptocurrency exchange. Experts recommend that you do extensive research before making your decision.
A crypto exchange is an online platform where you can trade and buy cryptocurrency. Exchanges can be used to trade crypto, such as Bitcoin to Litecoin or crypto to purchase regular currency like the U.S. Dollar. The market prices for the cryptocurrency they offer are reflected in exchanges. If you wish to trade cryptocurrencies in the future, you can convert them back into USD or another currency via an exchange. You can withdraw funds to your regular bank account or keep it as cash.
Tyrone Ross, a financial adviser and CEO of Onramp Invest (a crypto investment platform for financial professionals), says that there is no single crypto exchange that works best for everyone. He suggests that it is important to assess your interests in crypto and to find the exchange that best suits your needs. You might be looking for a particular coin or want to learn more about crypto investing.
“Am I looking to find something like Casa? Casa does a lot for me and I don’t have to worry too much about a private and public key. Are I going to Gemini because Gemini has a strange coin I like and they’ll let me buy it? Or should I go to Coinbase, because Coinbase offers these cool tools that let me learn and earn crypto.
What to look for in an Exchange
Accessibility
Due to national or state regulations, your location might prevent you from selling and buying crypto on certain exchanges. China and other countries have made it impossible for citizens to access crypto exchanges.
There is a lot of uncertainty surrounding cryptocurrency in the United States. Some states have even created their own regulations. New York, for example, requires that exchanges obtain a BitLicense in order to be allowed to operate within the state. It also allows licensed companies to only offer approved coins. While most other states don’t have the same strict regulations as New York, many others do or are working to regulate in some manner. According to the National Conference of State Legislators, 31 states have legislation pending regarding digital currencies during their 2021 legislative sessions.
On the website of the exchange or in the terms of service, you can often find information regarding the geographical limitations and related accessibility factors like the acceptance of national currencies.
Security
Your cryptocurrency holdings won’t be protected in the same way that traditional investments or money in banks. Cryptocurrency doesn’t have a central bank backing it. Coinbase and Gemini keep balances in the United States. Dollars that you have with them in FDIC insured bank accounts. However, FDIC insurance does not apply to cryptocurrency balances.
Some exchanges offer insurance policies that protect crypto currency users from fraud and hacking. Coinbase has an insurance policy that covers $255 million. Account holders would be protected if Coinbase’s crypto reserves were stolen and any amount up to $255million of crypto was taken. Kraken and others rely more on security measures than insurance policies to protect their clients.
The exchange’s security must be a top priority, regardless of whether you intend to store your crypto assets on the exchange or if you will only keep it there for a few minutes before moving it into your wallet. Check out how many assets are kept offline by the exchange.
As cryptocurrencies become more valuable, this is more crucial as potential thieves have more lucrative targets. There were 28 attacks on cryptocurrency exchanges in 2020. The largest attack resulted in the theft of more than $200m in cryptocurrency assets from KuCoin, a Singapore-based crypto exchange.
Check out how many of the exchange’s assets are kept offline. Although exchanges need to trade some crypto, it is smart to store the majority of assets in cold storage or offline. This makes it more difficult for hackers to access. Coinbase claims that 98% of its customer funds are stored offline while only 2% of it is traded. This storage combined with the $255 million insurance policy gives you more reasons to believe that your crypto assets will be protected in case of hacking.
You can also search for online security measures that you are familiar with, such as two factor authentication. This means that you will need to verify your identity beyond your username and password. You can also use a text message code to verify your identity each time you log into the site.
You may feel more secure with popular exchanges that have a large customer base. It is possible to take more risk by doing business with newer or smaller exchanges that do not have their security features and offerings clearly posted online.
Douglas Boneparth is a financial advisor who also serves as president of Bone Fide Wealth, New York. “Size does matter here,” he says. He points out Coinbase, which was recently listed on the Nasdaq stock market. There are pros and cons, but now you have public financials so you can see the company’s health. This is important when considering investing in an exchange or any product or service they provide.
Fees
Fees are something to be aware of, but you shouldn’t let high fees turn you away from an exchange. Spencer Montgomery, founder and CEO of Uinta Crypto Consulting (a program that helps new investors learn more about crypto), says, “The easier it is for you to purchase it, the higher their fee that you will be paying.” For the additional protections and insurance offered by larger, more well-known exchanges, higher fees can be worth it.
Although exchange fees can be fixed prices, they are usually a percentage of the trade. Cash App charges fluctuating fees due to price volatility. Fees can be charged per transaction and may vary depending on whether you are the buyer or seller. You may be charged different fees depending on the currency you trade. Before you hand over your cash, make sure you know exactly what an exchange will charge you for crypto transactions.
Liquidity
You should choose an exchange that has enough volume to allow you to trade, buy, and sell your crypto. This is another example where size can matter. The most popular exchanges often have the highest trade volumes.
Montgomery states that if there are a lot trades happening on an exchange at once, you have a better chance of selling or buying the crypto you own at the best price. The price of crypto is volatile, so if an exchange doesn’t have much trade volume, it could mean that you pay a higher price than if you were to use a more popular one. Let’s say that you decide to purchase Bitcoin when its price drops below $32,000. You may pay a higher price if you trade on a smaller exchange.
CoinMarketCap is a price-tracking website for cryptocurrency. It continuously tracks trade volume from hundreds of active exchanges. It currently lists Binance and Coinbase as the top three exchanges worldwide by volume.
Offer of coins
There are thousands of cryptocurrencies available, but not every exchange has them all.
You can find popular coins like Bitcoin and Ethereum on almost any exchange. You may need to shop around for newer altcoins or coins with a small market cap, as well as meme coins.
These coins can be even more risky than other cryptocurrencies. Experts recommend sticking with big names like Ethereum and Bitcoin. You should only buy any cryptocurrency coin on an exchange if you are willing to risk losing it.
Educational tools
Ross states that crypto beginners should be able to find out more about various coins, digital assets and blockchain technology when choosing an exchange.
He asks, “What do they do to keep you updated from an educational standpoint?”
Coinbase offers rewards to those who learn about new coins via its Coinbase Earn program. Coinbase offers rewards for taking part in quizzes and watching videos about different coins. You can either hold the crypto or convert it to another currency. You can also find articles and courses on the site that will help you understand crypto markets, history and innovations such as Binance Academy from Binance or Gemini’s Cryptopedia.
Storage
Cryptocurrency enthusiasts can have a difficult time deciding what storage is best for them. Many cryptocurrency enthusiasts believe in the “not you keys, not your money” adage. This means that you should own the public and private keys to your crypto holdings, instead of keeping them in your account for the exchange.
An exchange that allows you keep your crypto in your online account is a good option, especially for beginners. You may decide to store your crypto in your wallet later, after you have learned more about storage options and increased your holdings. Ross cautions against using exchanges that limit you to storing on their platform like PayPal. Robinhood has recently announced that it will create a crypto wallet to allow you to transfer your coins off-platform.
Ross states that once you have become more knowledgeable, you might want to move your coins elsewhere. You may be stuck if an exchange you do not have that option does not allow you to move your coins.
Tax information
Reporting cryptocurrency can make taxes even more complicated. Ross states that as the tax landscape changes around crypto assets, it will be crucial for individuals to ensure their tax situation is up-to-date.
Any crypto trades that you make must be reported as capital gains on your tax returns. This means that you will need to know both the price of your crypto when it is purchased in U.S. Dollars and the value when it is sold.
Robinhood allows you to transact only on its platform. Robinhood provides a Form 1099B that tracks your cost basis, gains, and losses. This is not the case for traditional exchanges.
“When you use cryptocurrency platforms like Binance or Kraken, CoinBase etc., they don’t give you that form,” Shehan Chandrasekera is a CPA and head of tax strategy at CoinTracker.io. This software company offers crypto tax software. Because exchanges that allow you move your holdings off of their platform cannot track all your transactions on other exchanges or your personal wallet. It becomes difficult when users need to use a tool that reconciles their whole picture, gets the data, then files their taxes.
Bottom line
Boneparth says there are other factors that you can take into consideration based on your personal preferences. These include customer service, user experience, mobile app and ease of use. Experts say that learning as much about crypto as possible before investing is the best thing you can do.
Consider the security and fees you are comfortable with. Also consider what additional steps you will take to store your coins.
Boneparth states, “You should probably spend more time learning about this space.” You’re taking a risk with your money in an extremely wild environment. It’s one thing for you to put your money in more stable markets. But it’s quite another to invest your money in volatile markets. It’s vital to be educated when dealing with assets that are more volatile than other risky ones.
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