How to choose a Bitcoin Exchange

Recently, trading in cryptocurrencies has gained significant momentum. While cryptocurrencies were introduced as an experimental technological experiment, it is now a worldwide phenomenon. In India, there has been a sudden boom in the magnitude of cryptocurrency investment and trading. However, investment and trading in cryptocurrencies may be daunting with an increasing number of cryptocurrencies available for trading.

Initially, Bitcoin was one of the very few cryptocurrencies available for investment and trading. Thus, trading in Bitcoin is comparatively less ambiguous than any other. Let’s discuss the steps to choosing a bitcoin exchange, its uses and factors to consider.

Steps to choose a Bitcoin Exchange

With thriving cryptocurrency markets, purchasing cryptocurrencies is easy and convenient. However, investors need to be aware about the safety and security of digital tokens and choose an exchange for trading in cryptocurrencies such as bitcoins.

The following factors are should be considered while evaluating the exchange for trading in cryptocurrencies:

  1. Transparency of the Exchange

    Trust and transparency are crucial because cryptocurrencies are not legally regulated. There are a host of exchanges available in each country. To identify a reliable exchange, evaluate the audit information of the exchange. Audit reports provide information regarding the financial health of a company. Transparent exchanges publish cold storage addresses and provide disclosures on methods to verify cryptocurrency reserves.

  2. Ease of Trade

    Another crucial factor to consider while choosing an exchange is the smoothness of trade. The turnaround time for the transfer and settlement of cryptocurrencies should also be evaluated. Some exchanges tend to offer ‘lock-in’ prices. The lock-in pricing system fixes the purchase price of the cryptocurrency irrespective of the price fluctuations till delivery.

  3. Coins and Tokens

    An investor must also consider the coins and tokens currently traded on the exchange. At the same time, it is imperative to assess the frequency of coin introduction. A delay in launching a cryptocurrency may lead to an opportunity loss for the investor. Thus, an exchange must be dynamic and constantly adapt to the market movements. Similarly, redundant and obsolete coins and tokens must be discarded from trading swiftly so as to protect the investor from falling prey to underperforming cryptocurrencies.

  4. Order Book Volume

    This is a consolidated list of purchase and sale orders offered on the exchange. High Order Book Volume indicates that more traders and investors are using the exchange. This, in turn, leads to higher liquidity for existing investors while exiting any particular cryptocurrency.

    Most exchanges publish the Order Book Volume to enhance user confidence. Although, it is not illegal for an exchange to not release the Order Book Volume. It may not be possible for the exchange to release the Order Book Volume in case it does not have the feature of doing so or the volume is lower than bigger exchanges.

  5. Settlement Mechanism

    This primary analysis is crucial since it is privy to fraud. Settlement refers to the manner of inflow and outflow of funds on sale and purchase respectively. Privacy at the time of settlement is of utmost importance.

    To invest in cryptocurrencies, investors are required to maintain funds in their accounts. Sometimes, it is also referred to as a wallet. An investor may add or withdraw funds using net banking, UPI, debit or credit cards or any other digital wallet. It may be worthwhile to note that cash cannot be employed while trading in the cryptocurrency market in India.

  6. Exchange Reputation

    The reputation of the exchange is perhaps the most subjective factor to be considered. An exchange may be very rosy and glossy if the exchange has invested heavily in media firms to build its reputation.

    Thus, the goodwill of exchange must be critically reviewed by the investor. Adequate research, discussion and professional guidance are advised for the same. Various interest forums provide honest, sincere and unbiased opinions. Simultaneously, investors must share their experiences to build a strong community.

  7. Fraud Alert

    Trading in cryptocurrencies involves high risks. The primary reason is the ambiguity surrounding cryptocurrency trades. The grey area around cryptocurrencies is tapped majorly by scammers. Thus, you need to be extremely vigilant and not become a victim of financial fraud. Scam exchanges should be avoided at all costs irrespective of the pricing advantage offered. It must be the utmost high priority to protect the hard-earned wealth.

  8. Location of Exchange

    Lastly, the location of exchange is equally vital to determine the rules and regulations applicable to the exchange. Investors must be aware of the registered office of the exchange and the adherence to relevant law and legislature.

    Investors are recommended to trade with a local or home-based cryptocurrency exchange. Additionally, investing in a local exchange eliminates the foreign exchange risk associated with trading with international exchanges. Investors are advised to be well-informed regarding the relevant tax regulations.

How To Use a Cryptocurrency Exchange?

The primary purpose of the exchange is to reflect the current market prices of the cryptocurrency offered. The market price is based on the demand and supply equilibrium. Users are also offered an option to convert the cryptocurrency into fiat currencies on the exchange and withdraw the funds. Alternatively, the user may choose not to withdraw the fiat currency and instead hold it with the exchange platform to trade in cryptocurrencies at a later date.

Criteria For Choosing Cryptocurrency Exchanges

  1. Exchange Fees:The quantum of fees levied varies from one exchange to another. While some exchanges charge a flat fee, some charge additional transaction charges. At times, exchanges levy fees at each step of a transaction.
  2. KYC Compliance: Every cryptocurrency exchange in India requires KYC Compliance to redeem profits. While the process is not lengthy, it safeguards investors from financial crimes.
  3. User Interface: The user interface offered by the exchange must be thoroughly tested for safety. Security is a priority for both mobile and web applications. It should not be overlooked since digital tokens are prone to theft and hacking.

Frequently Asked Questions Expand All

There are a host of bitcoin exchanges available for investors. Some of the prominent names include Coinbase, Binance, Kraken, CoinSwitch, etc. The choice of Bitcoin Exchange is subjective and must be in line with one’s preferences and priorities.

The above-mentioned factors are to be evaluated in conjugation with one’s investment objective and priority to determine the best-suited exchange.