How to Choose an Exchange in the Crypto Asset Market. Part 1 — Size
We begin publishing a series of articles on how to work in the crypto asset market. Practical lessons in a gaming form and training on historical data — both for beginners and professional traders — will be available in the summer of 2018 on SIMDAQ, our platform for democratization of the crypto asset trading. If something in this article remains incomprehensible, you can come in our community in Telegram, Twitter or Facebook and ask any question there. There are a lot of special tips in this new area, which we’ll share with you step by step. Now some common information for a start.
Part 1. Why Size Is Not the Most Important Parameter
On April 25, Adena Friedman, CEO of NASDAQ, one of the world’s largest stock exchanges, said that the exchange can be transformed into a digital asset trading platform in case of solution of a regulatory issue. Currently, for active operations with crypto assets you may choose one of more than 170 online platforms, which conditionally belong to the class of crypto assets exchanges. Only conditionally, because they differs from classical exchanges and a lot of them have not exchange license.
The number of cryptocurrency exchanges is growing every day. And a beginner in the crypto asset market can not easily understand which exchange is better for him. In addition, the fact that disappointing news about cryptocurrency exchanges, such as hacker attacks, fraud of founders, technical complexities, regulators’ claims and so on, regularly appear in news headlines, complicates the question.
Despite these questions, everyone can master trading on cryptocurrency exchanges. It is not necessary to enter there only through brokers, like in the classical stock markets. It’s worth to understand yourself the main features of the market and the rules of the game.
Greater Opportunities
A trading volume is one of the main, but not the only parameter of choosing a trading platform for working with crypto-currencies. This indicator answers immediately to two topical questions for a trader: liquidity and reliability.
The more the turnover, the higher the liquidity — this is ability to quickly sell or buy the required asset at a market price. In addition, a trading volume is indicative of the platform popularity for a crypto community; it reflects the confidence of market participants being one of the indicators of reliability.
BitMEX, Binance, OKEx, Huobi, Bitfinex, Bithumb, Upbit, Lbank, HitBTC and BiBox enter the top 10 exchanges in terms of trading volume, according to Coinmarketcap, currently.
But not all is so unambiguously. It was Mt. Gox, a leading exchange, with which the most significant market crash occurred in the crypto market history. More than 50% of the bitcoin turnover was concentrated at Mt. Gox when it underwent a hacker attack in 2014 and went bankrupt after losing $450 million of its customers’ funds. Some of them were compensated by funds of the Head of the Board of trustees of the exchange to those, who suffered from it, for a few years. During the investigation, the version of the attack was called into question by taking into account the facts pointing to the possible fraud of the founders.
This is another example of the fact that the volume of trading is not an explicit landmark. The Binance Exchange quickly took on the market and entered the top-10 in terms of trading volume in just six months, without being a leader before that. Many other platforms, leaders of recent years, on the contrary, recede their positions. Changes in positions occur quickly in this area. This should be taken into consideration when making decisions.
Large exchanges attract more attention of government regulators, so they bear higher risks in this direction. The legislative environment in this area is still in the process of formation. For example, SEC, a US regulator, had some questions to the Bitfinex Exchange; Binance didn’t have a license to carry out its activity in Japan and had already received a warning from the authorities. Another example is CEX, a smaller exchange, that has an e-money license, and is generally less vulnerable from the point of view of regulators’ possible attention. We will devote a separate chapter to this issue in our blog in the continuation of the series of publications on choosing exchanges.
Risks and Limitations
Underlying potential problems for a trader lie in that leading exchanges often become an arena for price manipulation by large players — “whales” — when small participants incur losses. The exchanges themselves can also use their information about transaction orders and orders for stop-loss and take-profit.
There are no guarantees here, as regulatory restrictions are not developed yet, and one can only rely on community trust, the history of the exchange and monitoring of users’ news and messages in specialized forums on such portals as Reddit, Bitcointalk and others. It should be noted that competition in the market resulted in information wars on the forums, and not all negative messages should be taken at their face value — we recommend you to study many materials from different sources and only after that to draw your own conclusions.
A limited availability for beginners is a feature of the largest exchanges, as many exchanges forbade registration of new users or introduced a high level of minimum deposits. So, you should have minimum $10 thousand to open an account on Bitfinex. At the same time, some exchanges conduct waiting lists to add a new customer later when they increase their capacity.
A decentralized approach based on the blockchain technology when users conclude deals directly with each other, and don’t transfer their funds to the exchange can insure them against many risks of traditional exchanges. For example, the Waves DEX Exchange was created by this principle, where our SMQ tokens are circulated.
According to many industry leaders, our future lies namely with the decentralized exchange trade, but now 99% of the turnover of crypto-currencies accounts for centralized exchanges. It does make sense for traders to start trading on decentralized exchanges combining them with centralized ones.
One way to protect customer’s funds against hacking is so-called cold storages where the stock exchange is stored up to 80% of users’ funds on computers disconnected from the network. Nearly 25% of exchanges allow users to have their own control keys from their wallets.
We will write more details about how exchanges protect customer’s funds and how to take this factor into consideration when choosing an exchange in one of the following articles.
