Cryptocurrency Exchanges: What They Are and How to Choose

What Are Cryptocurrency Exchanges?

Cryptocurrency exchanges are online platforms hosted by companies or other entities that make it convenient for users to purchase and sell cryptocurrency.

When cryptocurrency was first introduced, you had to manually enter a command in a terminal to send a coin to someone. Eventually, user interfaces were designed that made it easier to access cryptocurrency. Realizing that cryptocurrency could only make a mainstream appearance by making it less technical for average users, developers created exchanges that hosted services for people interested in owning and transacting in crypto.

Cryptocurrency exchanges now work similarly to a broker, giving you the tools to trade, buy, and sell cryptocurrencies like Bitcoin, Ethereum, and Tether.

How to Choose a Cryptocurrency Exchange

1. Be Cautious

The first thing to remember 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 genuine impact on individual investors.

Mt. Gox, one of the earliest digital currency exchanges and once one of the most popular, collapsed after a hack. Others have also been hacked or otherwise compromised.

How does one make sure that a particular cryptocurrency exchange offers a legitimate service? Start by looking for the physical address associated with the exchange. If there is no address readily available, you should not use it.

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 legal ramifications of your investments. Third, should your account 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 research the exchange you’re considering thoroughly.

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, this 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.

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

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 that 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 daily transactions? If so, perhaps consider an exchange with a lower per-transaction fee. Additionally, you should be aware of the blockchain transaction fees you’ll need to pay that are paid to blockchain participants for work done on the chain.

Another important consideration is the cryptocurrency pairs that an exchange offers. Coinbase, one of the world’s most popular and successful exchanges, offers more than 9,600 assets on its exchange, but only about 420 are available in tradeable pairs.

If you’re looking for obscure altcoins to trade, you may want to look elsewhere, although Coinbase is considered to be excellent about security, user experience, and other trading considerations. Make sure that you keep in mind how your own investment practices will relate to the features (and limitations) of any exchange you might use.

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 fact that roughly 226 of these exchanges are currently available globally.

When you’re deciding on which exchange to choose, it’s important to look at the currencies supported, pricing, fees, withdrawal options, and security.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns bitcoin and XRP.