Cryptocurrency Exchanges: What They Are and How To Choose

Did you know there are thousands of digital currencies, with more being added every month? Curious new crypto investors need to start by making decisions about how to invest, including how to store their digital assets. Investors will need to evaluate where and how to transact in cryptocurrencies, and whether staking tokens—a way of earning rewards or interest for holding certain cryptocurrencies—is worth it. That means deciding to trade on a crypto exchange, and learning how you will use it.

Exchanges work similarly to a broker, giving you the tools to buy and sell cryptocurrencies like Bitcoin, Ethereum, and Tether.

Follow these steps to find the proper exchange for your investing needs.

1. Be Cautious

The first thing to keep in mind when searching for digital currency exchanges—and when considering any aspect of cryptocurrency investing—is that scams and fraud are out there, and they can have a very real impact on individual investors. Mt. Gox, one of the earliest digital currency exchanges and once one of the most popular, collapsed. Others have been hacked or otherwise compromised.

How does one make sure that a particular cryptocurrency exchange offers a legitimate service? First, look for the physical address associated with the exchange. If there is no address readily available, you should not use the exchange. There are many reasons for this. First, transparency is often a sign of legitimacy.

Second, without knowing where the exchange is based, you won’t have a good sense of the often-thorny legal ramifications of your investments. And third, if your account should get hacked, it is much easier to address these issues with the exchange and any regulators that may need to be involved if you have a physical address for the exchange itself.

2. Do Your Research

When it comes to cryptocurrencies and exchanges, reputation counts. Before you even go so far as to create an account (which should reflect a high level of trust, as it entails a user passing over private information of various types), take time to thoroughly research the exchange you’re considering. What do other users say about the exchange?

What does the exchange say about itself? Have there been issues with security in the past? If so, how has that exchange addressed those problems? In your search, dig deep; look for potential negative stories that the exchange development team would not want potential customers to see.

3. Go With Higher Security

The harder it is to create an account at a particular exchange, the better. If it’s too easy to generate an account, that suggests that an exchange is not particularly trustworthy. What happens, then, if your digital assets suddenly disappear? You may have a much more difficult time tracking down and retrieving your money in those cases.

Regardless of the exchange you choose, it’s a good idea to keep the large majority of your digital assets in an offline storage service like a cold wallet, which is often even an option for staked coins. Exchanges should do the same with their assets that aren’t required for liquidity.

4. Beware of Fees and Pairs

You’ve sifted through the pool of potential exchanges and found some that appear to have excellent reputations, stellar histories concerning security, and no history of hacks or scams. That’s a great start, but now you’ll need to consider how each exchange will affect your daily investing.

Two major factors that distinguish different exchanges are the fees and the currency pairs they offer.

Learn about the fees and consider how they would impact your investing based on your style: Do you plan to be highly active, making transactions every day? If so, perhaps consider an exchange with a lower per-transaction fee. If you’re considering transacting ether, you will want to be aware of the “gas” fees you’ll need to pay that are associated with various transaction types.

Another important consideration is the cryptocurrency pairs that your exchange offers. Coinbase, one of the most popular and successful exchanges in the world, only offers a relatively small selection of digital currencies for its users. If you’re looking for obscure altcoins, you may want to look elsewhere, although Coinbase is considered to be excellent about security, user experience, and other trading considerations. Make sure you’re keeping in mind how your own investment practices will relate to the features (and limitations) of any exchange you might use.

For example, if you purchase Algorand (ALGO) on Coinbase and choose to stake, you will earn more ALGO rewards at almost 6.0% annual percentage yield (APY).

The Bottom Line

The most popular and straightforward way of buying, selling, and staking digital assets is through a digital currency or cryptocurrency exchange. Sound simple? Perhaps not when you account for the roughly 270 of these exchanges that are currently available globally. When you’re deciding if or which exchange to choose, it’s important to look at the currencies supported, pricing, fees, withdrawal options, and security.