Investing in cryptocurrencies is different from investing in banks, traditional stock exchanges, and credit unions. Unlike them, investing in cryptocurrency exchanges doesn’t offer any guarantees and a small mistake could cost you everything. To begin with, there is no customer care number to call when you need help or company headquarters that you can report to in the event that you lose your funds. Second, these investments have no support from FDIC insured banks, meaning you can lose all your money to cyber-attacks with no help at all.
To top it all up, there are a big number of fake and fraud exchanges who are offering different coins to attract newbies. You need to be extremely conscious when choosing a reliable cryptocurrency exchange to trade your coins. Other than knowing about different cryptocurrencies, it is vital to learn the ins and outs of the exchange you will be trading/ investing on.
With so many crypto exchanges to choose from, one may become so overwhelmed especially if you are a newbie in the crypto world. But, there are professional comparison tools for different to get you started.
Here are some of the mistakes you should avoid when choosing a cryptocurrency exchange:
Going for a New Crypto Exchange
With the many cryptocurrency exchanges around, it would be a bad idea to choose one that is new and hasn’t been tested. This is because the exchange might inconvenience you by prohibiting withdrawals or becoming unavailable when you need it the most. It is advisable that you use a credible exchange that has been in existence for a while. Also, ensure they accept various cryptocurrencies.
Choosing the Wrong Type of Cryptocurrency Exchange
There are three major types of cryptocurrency exchanges, so it is paramount to understand them before selecting an exchange. Just like forex brokers, cryptocurrency brokers like AvaTrade fix prices so that investors can purchase virtual currencies through the DCE. These kinds of exchanges are highly unregulated.
Then we have trading platforms including Binance, Kraken, BitFinex, Localbitcoins, Coinbase, Bitterex, BitMEX, and HitBTC among others. These are among the most popular in the crypto world, though they are more prone to hacks.
Lastly, we have peer-to-peer exchanges such as cointal that unite buyers and sellers and allow them to mingle and relate directly. Both participants make a decision on any particular transaction. The P2P network is less congested and is very secure and trustworthy.
Failure to Check the Legality of the Particular Exchange in one’s Country
The future belongs to individuals who adhere to both national and international laws and regulations. It, therefore, pays to choose an exchange that is registered under the company act in that particular country. It should also possess the necessary licensing and certification to run the business. Also, be keen to check the country’s relevant laws and regulations concerning blockchain and cryptocurrency. Depositing your coins in an exchange that is in a country that is highly politicized or is anti-crypto is probably not the smartest idea.
Also worth noting is the fact that cryptocurrency is a highly volatile and new field. It is not uncommon to hear of crypto exchanges that have unjustly withheld or confiscated investors’ funds. We recommend that you choose an exchange that is based in a familiar jurisdiction or one where you can seek legal discourse in case of anything.
Failure to Confirm the Volume and Liquidity of the Exchange
Liquidity is the ease of buying and/or selling in the market. When the liquidity is high, it means there are a large number of buyers/sellers. In crypto exchanges, high liquidity means the ability to fill an investor’s order regardless of the time of day, and no matter how small or big the order is. High liquidity is advantageous as it allows better price discovery and leads to faster transactions.
While liquidity is a really important factor to consider, whether you go for high or low liquidity will greatly depend on the kind of trading you intend to do. For instance, if you plan on trading in small tokens such as the ERC20 coins, then a smaller or decentralized exchange will suffice for you. But, if you plan to buy/sell one of the leading coins out there (BTC or ETH), then you are better off with a major centralized exchange. Centralized exchanges are not only highly liquid but are fast as well. Investors are often able to fill out their orders in seconds!
Going for an Exchange with Inadequate Support, Security, & Anonymity
With crypto hacks and losses reaching billions, potential investors need to hunt through the exchange’s security protocol before settling for one. Examples of hacks include DragonEx, Mt. Gox, CoinBene, Coincheck, and Cryptopia.
Can you get your question answered by a knowledgeable person, or you will always be directed to a skimpy FAQ page or a user forum?
In terms of security, it is good to go for an exchange that has other forms of end-user authentication during login. An example is the 2FA code that most exchanges demand when attempting to use their website. Also, in case your IP address changes to a new one, the system will have to confirm it is you before you can log in.
When choosing a crypto exchange, it is vital to avoid the above mistakes. Remember different exchanges have different ways of building their network, building user experience, ensuring security precautions, and regulating its users. Overall, it pays to do your research and be knowledgeable about the different exchanges so that you can be able to choose one that is safe and long-lasting.
InWara is the best place to start your search. This crypto exchange database provides data on the security measures taken by each exchange, their trading volumes, KYC process details, transaction fee limits, and acceptable payment methods among other things. It has an exhaustive list of over 200 exchanges with more than 100 data points covered under each exchange.