Still Using Custodial Exchanges? Here’s Why You Might Reconsider

Are you on Kraken, Poloniex, Bitfinex and similar?

You should consider trying instant exchanges instead.

The difference between custodial and instant is simple. With the former, they hold your coins. With the latter, you hold your own coins in hot wallets. A good analogy would be Your Bank vs Your Local Cash Change.

To help figure out which is best for you, I’ve prepared a list of pros and cons of instant exchanges for your reading pleasure. Let’s compare the two types of exchanges and help you make the right decision.

Pros

• Ease of use. Most instant exchanges take no more than 2 actions to initiate a trade. Once the trade is underway, all you have to do is sit and watch. For example, our exchange (shown in screenshot) is designed to be as simple as possible. The fact that you don’t need to create an account further simplifies the process.

• Control. When using a custodial exchange, your funds exist on a virtual account owned by the exchange. Provided the exchange actually has the reserves to back their stated volumes (not guaranteed), the funds will usually be stored in non-segregated hot wallets belonging to that exchange. In essence, a third party entity holds your coins. What happens if an exchange suddenly goes out of business due to a hack, mismanagement or any other reason? Yep, you probably lose your coins. This already happened many times before (Mt. Gox, BTCe…) and will happen again. With instant exchanges, you hold your own coins in your own wallets. The only time the exchange holds your coins is during a short transfer window (For us at Nexchange that is no more than a few seconds). Your coins spend the rest of the transactions on their respective blockchains before they land safely in your private wallet.
• Security. By retaining complete control over your wallets, you are solely responsible for securing your funds. If you are an experienced crypto user, this could be a very good thing. Big exchanges are often under attack, and are sometimes successfully hacked. As a small and smart target, you are unlikely to be singled out, and if you take the necessary precautions, unlikely to be hacked.
• More currencies. If you’re looking for some exotic token that one of the big exchanges doesn’t carry, try the instant exchanges. Instant exchanges have an easier time, both legally and technically, to integrate new coins and tokens, which is why they tend to adopt fledgling cryptos earlier than the big players.

From ShapeShift

• Freedom. You don’t need to create an account in order to make a transaction on an instant exchange. Other than the obvious benefit of anonymity, this also means that you don’t have to commit to this exchange and limit yourself to the coin selection available there. If you are looking to diversify your portfolio, moving to use your own wallets (and instant exchanges) can make it that much easier for you.

Cons

• No fiat. Crypto to crypto instant exchanges don’t allow crypto to fiat trading (and vice versa). This is because part of the appeal of instant exchanges is the ease of use and anonymity. By adding fiat to the mix, you also add cumbersome verification processes and require people to open accounts. The drawback is obvious — there’s no converting Bitcoin to USD available.
• Security. Written above as a benefit, it can also be a drawback. If you don’t know what you are doing, you are better off trusting a custodial exchange to safeguard your coins.
• Relatively high entry barrier. Before you can start using instant exchanges, you need to understand how wallets work and already pre-own some crypto (due to the fact that there’s no fiat). While none of this is inherently difficult, as a beginner you may find custodial exchanges more welcoming.
• No fancy trading tools. Instant exchanges usually lack the fancy trading tools of custodial ones. This means that there’s no limits, leverage, margin, loans, etc. Instead you trade spot price, and that’s it. I personally consider this a benefit — unless you know what you are doing, using leverage will liquidate your assets more often than it will bring you profits.

Conclusion

If you don’t trust big exchanges, want to retain full control of your funds and are an advanced user, instant exchanges are a no brainer. The flexibility, anonymity and ease of use are hard to beat.

If you are ok with letting someone else manage your money, are a relative beginner, or need fancy trading tools, then custodial exchanges are probably a better fit.

How to get started

The two bigs players in the instant exchange field are ShapeShift and Changelly. These two services are very similar and usually differ in price, coin selection and transaction speed.

An alternative is us, Nexchange.

Why use us?

Simple. If we carry the currency you are interested in, we are probably cheaper than anybody else. Don’t believe us? Take a look at our live price widget (on our homepage) and compare for yourself.

On our widget, ShapeShift and Changelly rates are calculated with their fees included. ShapeShift fee is 1.5% from Poloniex price, Changelly is 0.5% from Poloniex price. If you notice a discrepancy between what we show and what is on their websites, this is probably why.

We also pride ourselves on great customer service and fast transactions. Check us out!

P.S. If you have any questions regarding our platform, using instant exchanges, or even crypto in general, don’t hesitate to get in touch.

If you decide to give us a try, I would love to hear about your experience at daniel@nexchange.io