Over and above everything,
cryptocurrency exchanges are vital infrastructure. They are conduits
through which listed tokens become liquid. Exchanges are gauges from
where investor sentiment can be categorically measured and token/coin
priced accordingly. Technopedia says a cryptocurrency exchange is
“any system that operates on the basis of trading cryptocurrencies
with other assets “adding that their “core operation is to allow
for the buying and selling of these digital assets, as well as
others.” From this it is evident that cryptocurrency exchanges,
regardless of categorization—decentralized or centralized—are
here to stay. The sphere may evolve and the best–fronting and
aligning their objectives with blockchain principles while
simultaneously providing the best user experience, will dominate.
Thus far, there are countless exchanges.
Binance is global while CoinBase is
limited to certain jurisdiction. Some are decentralized and secure
but a big chunk is centralized and consequently, susceptible. While
others are in investors’ good books because of tier-1 security,
others are liquid but “easily forgiven” despite scandals trailing
its operation. BitFinex is one of them. However, today’s objective
is to study some features that classify an exchange as “good”.
After all, there are many cryptocurrency exchanges trading against
both fiat and crypto while others pairing assets against each other
with no fiat.
While searching for a good
cryptocurrency exchange, always consider the below:
Compliance and location
Guiding this consideration is simple.
Crypto is global and cryptocurrency exchanges are always on the
lookout for the best destination that favors or even protects their
operations. Remember, crypto is global but order books are
centralized. Lack of regulation means there is a chance of
manipulation and in a competitive field; data reveal that 95 percent
are involved in unscrupulous activities as wash trading and other
illegalities. However, most of these foul playing exchanges are
located in countries with lax or undefined laws around blockchain.
Always settle for an exchange based in countries with defined laws
around crypto trading and blockchain in general. Exchanges based in
the US, the UK, Australia, Europe, South Korea and Japan is a good
start for novices. With strict regulators, manipulation is low and
there is investor protection just in case there is a hack.
Liquidity and Fees
Liquidity is the ease of converting an
asset to cash. In crypto, Bitcoin and basically most of the top-10
assets are very liquid meaning conversion has low spreads costing the
end user less. Measuring liquidity is daily transaction volumes as
conveyed from the exchange’s order books. However, this order book
is where rogue exchanges manipulate to broadcast success and attract
unsuspecting customers. Often, liquid exchanges also charge low fees
depending on monthly volumes. If selling or buying huge volumes, fees
will be low and vice versa.
Other factors to consider include the
number of tokens listed, security, reputation and customer support.
All the same, the trader or investor must do their due diligence.
Always settle on trusted exchange, with open fees based on regions
with clear crypto laws.