Home > Which characteristics qualify a good cryptocurrency exchange?

Which characteristics qualify a good cryptocurrency exchange?

good-exchange

 

How is it that some people always use the most trustworthy & sound bitcoin exchanges – while others get trapped with poor-quality insecure platforms?  From the slow collapse of Cryptsy altcoin exchange to the never-ending MtGox fiasco – there are some important lessons that everyone can learn.  Indeed, knowing the factors that qualify a good cryptocurrency exchange v.s. a bad one is like knowing which banks can be trusted and which cannot.

In a rush? You can skip straight to my reviews of the best sites to buy bitcoin – these all qualify as good bitcoin exchanges.

Using my experience as a bitcoin trader & helping others on/0ff-ramp into cryptocurrency, here are the most important signs to look out for when choosing an exchange:

Recommended place to trade Bitcoin

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Min. Deposit
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10
Accepts customers from the USA
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Description:
eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
Cryptoassets are highly volatile unregulated investment products. No EU investor protection. eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.

Commissions & Fees

No one likes to get over-charged. Paying the cheapest fees is always important. Some exchanges are very transparent about how much you will pay to deposit, buy, sell, store, and withdraw. However, other places are more discreet about how they extract fees from your hard earned money.

Some sneaky fees to look out for are:

  • Monthly “wallet fees” for keeping cryptocurrency on the exchange. Everyone knows there is no incremental cost to “managing” a bitcoin address – regardless of how much it contains. Imagine if supermarkets decided to charge people hourly fees for using trolleys.
  • Excessively large bitcoin withdraw fees. The operators my try to justify such fees with terms like “transaction backlogs”, “blockchain bloat”, or “mempool overload”.
  • Verification admin charge. Nobody should have to pay to get their ID verified. Exchange are obliged to submit everyone to vetting.
  • Excessive deposit fees. Realistically exchanges get charged by their banks anywhere between 1 – 10 usd when you deposit money (less for SEPA transactions) in their accounts.

Most sites make their revenue by having a small margin on the buy/sell rate. Do look into commissions before you deposit money anywhere.

 

Payment Methods

Why would deposit methods influence the ranking of an exchange? Simply because when customers have decided to trust a certain place, they tend to stick to the same site. Such behavior means that customers prefer to have a range of choice for depositing and withdrawing fiat/crypto. If there is not enough options then customers have to research alternative sites – and this takes time!

I’m yet to find a site that accepts all four of the most-used payment methods:

  • Bank transfer – 75 % of exchanges accept SEPA or wire transfers
  • Credit card – 15 % of exchanges accept Visa/Mastercard/AmEx
  • PayPal – 2 % of exchanges accept PayPal
  • Cash – 10 % of exchanges facilitate cash purchases through WesternUnion, p2p meetups, Payoneer and other mediums

Most places will accept either one or two. For example, the three largest exchanges accept both bank transfer and credit card deposits.

 

Ease of Use

It is funny that some sites are still, in 2017, so hard to use. Sometimes I think that the creators actually asked themselves: “how can we make this as hard as possible for new users to understand…?”. It is really important to start off simple. Don’t try use a decentralized exchange if this is your first day on bitcoin. Choose a site which accommodates beginners.

Try to avoid trading sites that have:

  • Multiple & extended down-times. No point signing up if you can’t access the web server.
  • Non-intuitive user-interfaces. Having to look up support for each trade will quickly get frustrating.
  • Non automated withdraw processes. Users must not need to ask for permission to take out their money.

Some of the leading exchange sites are actually very easy to use, but also offer more advanced features for experts.

 

Security

If you are new to bitcoin, you may have heard mainstream media reports about how “bitcoin was hacked” or something similar. Thankfully you have gotten this far & ignored the prophecies of incompetent journalists. What actually happens is that bitcoin exchanges do themselves get hacked. This has nothing to do with bitcoin the protocol – which remains incredibly secure and has never been compromised since its creation (Edit: redditor /u/dooglus correctly points out this overflow incident in the early days of bitcoin). So it is indeed important to choose an exchange with good security.

Some indicators that an exchange is following security best practices are:

  • they provide proof of coins in cold storage.
  • all new users must verify their identity and location before depositing
  • the exchange offers and encourages customers to use two-factor authentication
  • the operators resist and reason with regulator demands on how the exchange should be run.

Some indicators that an exchange may have been compromised are:

  • a long & persistent backlog of bitcoin withdrawls (users waiting days to receive withdrawls)
  • an increasingly large difference in the quoted price of bitcoin compared to other exchanges
  • media allegations of theft. Coindesk.com is a reputable source for bitcoin news.
  • silence from operators who may stop responding to community questions/allegations

Rest assured, most people simply withdraw their coins to an offline wallet once purchased. That way you no longer need to worry about how safe the exchange is, because you now have sole control over the private keys.

 

Customer Service

It’s good to research each site’s customer service records before depositing. Some places are really fast to respond to customer queries, while others may take days to get back to you. Keep in mind that you will necessarily be interacting with support at some stage as most sites now require ID vetting. This stage usually involves several emails, so it’s important that the site has employed enough agents to respond to users in time.

As exchanges get more sophisticated and secure, some have developed account-flagging systems which may temporarily freeze users’ funds. Flags can be set off for a variety of reasons, but usually get sorted once you reach out to a customer support representative.

 

Community interaction

This aspect should be given more weight. After all, the bitcoin community is a thriving eco-system. Exchanges don’t exist in a void, and those that are reaping all reward without giving something back really don’t deserve your custom.

Good examples of community interaction include:

  • participating & solving queries on bitcoin forums, notably the /r/bitcoin sub-Reddit. Localbitcoins & CEX are very active in this area.
  • contributing to bitcoin-events, hackathons, and sponsoring cryptocurrency education initiatives. Coinbase had a cool bitcoin app competition/hackathon last year.
  • being as open-source as possible. Sharing and taking innovation from the community. Poloniex, the largest cryptocurrency exchange, has a lot of open-sourced front-end code & a great API (a public interface for programmers to build their own apps on top).
  • remaining positive & professional. Bitcoin has a lot of scandal, emotion, & controversy. Those that refrain from slander get my appraisal. US-based exchange Gemini has played their cards right by staying neutral throughout the block-size debate (an extended disagreement within the community over how the bitcoin code should evolve).

 

What other factors make an exchange meet or miss industry standards? You can let the community know by leaving a comment below.

Recommended places to trade Bitcoin

1
Min. Deposit
$50
Exclusive promotion
Our score
10
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Start trading
Description:
eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
Cryptoassets are highly volatile unregulated investment products. No EU investor protection. eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.
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Min. Deposit
$50
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Our score
9.3
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Founded in 1999, part of GAIN Capital Holdings. Licensed in highly regulated jurisdictions, FCA, IIROC, NFA, CFTC, CIMA,FSA. Payment methods ACH, debit card, bank wire transfer. $50 minimum deposit.
Payment methods
Debit Card, Bank Wire, ACH, Credit Card, PayPal
Full regulations list:
CIMA, NFA, CFTC, FCA, IIROC, ASIC, FFA Japan, MAS, SFC of Hong Kong
Forex trading involves significant risk of loss and is not suitable for all investors.
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Margin Trading
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Description:
Cex.io offers exchange of fiat currency for Bitcoin Ethereum, Tether, and 23 other cryptocurrencies, as well as Bitcoin/Ethereum trading against the USD.
Payment methods
Credit Card, Debit Card, Wire Transfer, Cryptocurrencies, Skrill
Full regulations list: