How to choose a cryptocurrency exchange

Have you seen the Internet lately? There’s a lot of cryptocurrency trading going on. But too much of it is pure speculation, based on nothing but hype and herd mentality. And a statistically significant percentage of the remainder is based on incomplete or poorly understood information. These strategies have a certain charm: If somebody throws money in the air, maybe some of it will blow your way. But if you want the best possible predictable outcomes, you’re going to need a little context.

Maybe you’re new to cryptocurrency trading, and you’re looking for a good exchange. You don’t have millions to invest. You’ll call it a success if you can avoid a scam. Or maybe you’re an old-school trader trying to make sense of the new game in town and the bewildering number of options available to you. What’s a safe investment? Is any of it safe? Are you better off putting your money in shoe laces?

In this article, we explain how this brave new world arose and how to navigate it. We also introduce you to our TimeX exchange, now in pre-beta stage, and provide a point-by-point breakdown of why it embraces the best of what cryptocurrency trading can be, all based on our previous analysis. How’s that for context?

How we got here

We don’t know if you’ve noticed, but the world has changed. Advances in communication technology have made it possible to transmit information from any two locations on the planet securely and instantaneously.

These developments have fundamentally altered the ways that we think about everything. For any resource that you can name, if it has a finite quantity that needs to be allocated, its traditional distribution channels are open to disruption from outside players.

Financial markets are no exception. In fact, they’re the textbook case. When the first modern systems of international trade emerged, the pinnacle of communication technology was the postal service. So the conventions that we built up around these systems assumed the existence of physical paper that literally moves from place to place. That’s a resource-intensive model. And there are all kinds of inflection points between two places like that can cause unexpected delays or losses, even when the logistics aren’t all that bad.

The financial record that the paper represents in the old Christopher Columbus model can also be represented as a stream of electronic data. Financial markets have adopted this technology to move beyond the postal service, but now they’re stuck in the telegraph stage. That’s what all this “wiring money” is about. If you ever wired money to someone, you sent them a telegram. And even though the transmission occurs electronically, the verification of the record takes time and resources. Why? Because telegrams get turned into paper, and paper needs to be verified by humans, just like our great-great-great-great-grandparents did during the Victorian era.

We have a new way to verify transactions that is natively digital, machine-automated, and, for all practical purposes, impossible to cheat. It’s called the distributed ledger. You probably know it better as the blockchain. Traditional exchanges aren’t quite ready for it, so new kinds of exchanges that are have cropped up. Call them cryptocurrency exchanges. They’ve been built for trading digital currency like Bitcoin, but that’s far from the end of their potential usefulness. With simple extensions of the cryptocurrency concept, you can trade absolutely anything of value, including fiat currencies, stocks, bonds, and whatever else interests the (former) masters of the universe.

It’s safe to say that, over the last couple years, there has been an explosion of cryptocurrency exchanges, each representing an alternative global financial market in direct competition with the old order. All these markets are new, and most of them are untested. Volatility? Realignment? Just another trading day, which never closes. People have already made—and lost—fortunes.

With those kinds of stakes on the table, it’s important to assess a cryptocurrency exchange to make sure that it’s a good fit for your style of trading.

Evaluating a cryptocurrency exchange

All cryptocurrency exchanges are risky, but this doesn’t make them inherently bad. Certain kinds of stocks are risky, too, because of volatility or underlying uncertainty, and they’re traded every day in the mainstream markets, and that’s just one of many examples. Like with stocks, there are degrees of risk depending on how you approach cryptocurrencies. The more risk that you assume, the more profit that you stand to gain or lose.

Your approach to risk in cryptocurrencies is no different than it is for other kinds of investments. First you determine your tolerance for risk, and then you choose an exchange accordingly.

Certain exchanges are less risky than others because they’ve been set up to mitigate the most severe effects of a largely unregulated and uncertain marketplace. Traders on these exchanges want to see how it goes. No one would confuse them for the timid type—if they weren’t adventurous, they wouldn’t be in cryptocurrencies. They’re not averse to some thrills and excitement, and they go in expecting some ups and downs. But they’re not prepared to go all in. They can afford to lose something, but they don’t want to risk everything.

Other exchanges are inherently riskier because they’ve done away with any constraint that would cool them down or balance them out. The traders on these exchanges want the wildest ride possible. Don’t ask them where their investment will be in five years. They don’t know where it’ll be in five minutes. They’ll bet big, win big, and lose big on these exchanges. Some of them will expose themselves to legal jeopardy. Others will fall for intentional scams. That’s all part of the risk that they’re willing to assume.

When you’re researching a cryptocurrency exchange, you can make a good guess about its level of risk by looking at a couple key characteristics.

Centralized or decentralized?

In a centralized exchange, the exchange itself holds all the funds. You don’t trade directly with another party; rather, you both use the exchange as a clearinghouse. The exchange makes sure that each side gets the agreed-upon value.

The disadvantage to a centralized exchange is that it requires the trust of both parties in a transaction. It’s not enough that you trust each other. You must also trust that the exchange won’t run off with your funds or expose itself to vulnerability from hackers.

The alternative is a decentralized exchange, which has no holding or overseeing function. People on these exchanges trade directly with other traders. It’s a peer-to-peer network, in other words. These sorts of exchanges are said to be trustless, because the exchange itself isn’t making the deals. It exists only to facilitate electronic trades, not to take part in the transactions. And because there’s no central bank to hack, the exchange is more secure.

(To add to your arsenal of buzzwords and abbreviations, you often see the terms CEX and DEX in online conversations about cryptocurrency exchanges. These are just coolspeak for centralized and decentralized exchanges, respectively. And, yes, CEX is pronounced like a similar word that starts with the letter S.)

What extra security?

It’s an unfortunate reality of the state of our world that, even when the exchange is decentralized, there might be bad actors monitoring the online activity of the individuals making a trade. So you want an exchange that supports a variety of additional security protocols to protect the trading activity that goes on there.

A very popular choice here is 2FA, or two-factor authentication. You probably have a version of this on your smartphone. Under 2FA security, providing a single authenticator, like a password, isn’t enough. You also need to provide a corroborating authenticator, like confirmation from your mobile device. Only when both factors point to the same user is the permission granted. Since it’s much less likely that some Internet criminal will have a clone of your phone even if they get their hands on your password, 2FA adds an essential extra layer of security for sensitive online interactions.

Barebones or all the toys?

You also want to look at the range of features that the exchange provides. In general, more options means better flexibility and safer investments. Some exchanges provide only the most basic trading capability. You can exchange cryptocurrencies, but you might not be able to do margin trading or place stop-loss orders. A full-service exchange goes out of its way to solve the complex technical problems associated with certain kinds of trades and makes the technology as transparent as possible so that it’s as easy as possible to use.

Also, don’t dismiss the value of real-time reporting, dashboards, and alerts. You can trade in an environment that provides graphical elements like charts, graphs, and trend indicators, so that you can see at a glance how the market is doing on a moment-to-moment basis, and you can get notifications based on your trading needs for rapid response to changes on the ground—and let us assure you that there will be plenty of those. Or you can trade from a basic interface. It might get the job done, but it doesn’t help you to do it.

Which assets?

The universe of tradable digital assets is nothing if not an expanding universe. New classes of these assets are appearing all the time, not to mention new instances of existing classes. There are “traditional” digital assets like Bitcoin. But there are other kinds of digital assets that include the capability of internal logic or smart contracts, and these assets don’t need to represent currency. They can conceivably represent anything of value: labor, time, a precious natural resource, stock in a company, and on and on. Digital assets that follow the emerging ERC-20 standard are a good example of this kind of thing.

Not every exchange enables you to trade every available digital asset. In fact, the exchange needs to list the asset, just like a stock exchange needs to list a stock. New listings require new implementations and maybe some new technological wizardry behind the scenes to get the implementations to work, so barebones exchanges can struggle to stay current. Be sure to research the types of assets that are listed on the exchange to make sure that the ones that you want to trade are supported.

You should also have a look at trading pairs, or assets that are directly tradable. For example, if you trade on an exchange that lists the BTC/USD trading pair, or Bitcoins for U.S. dollars, then you can convert Bitcoins to U.S. dollars and back again. The two have a direct relationship on the exchange. If, however, you want to trade a more exotic cryptocurrency for U.S. dollars and there isn’t a corresponding trading pair on exchange, you’ll need to convert the cryptocurrency to something like Bitcoins before you can convert it to U.S. dollars.

(By the way, you might hear the term altcoin thrown around by cryptocurrency traders. For a strict, by-the-book definition, altcoins are any cryptocurrency other than Bitcoin—which means that Ethereum, one of the most popular, most widely traded cryptocurrencies in the world, is technically an altcoin. But in everyday conversations, we tend to reserve the term for smaller, newer, or less popular cryptocurrencies.)

How much liquidity?

Liquidity is a key factor in predicting the resilience of the exchange to shocks and the favorability of the rates that the exchange can offer. A newcomer to cryptocurrency trading might not be expecting just how much exchange rates can vary depending on the volume of the exchange as well as the trading volume of a particular asset. But the underlying economics are exactly as you’d expect. More volume means more liquidity and more relative price stability, which tends to even out the exchange rates. Conversely, less volume means less liquidity, less price stability, and more volatile exchange rates.

If you conduct your trades on an exchange with greater volume, you’re less exposed to these extremes.

What fees?

Most cryptocurrency exchanges charge transaction fees to keep the network up and running and in good health. It’s just the reality of the situation. But each exchange has its own policies, and the fees can vary widely. Some exchanges won’t charge for certain kinds of transactions, whereas others will. Some exchanges might charge fees for institutional customers but not for private investors, and so on.

It’s common for cryptocurrency exchanges to differentiate between maker fees and taker fees, with makers getting the more favorable rate. The maker fee applies when the trade doesn’t match an existing order on the books, thus creating liquidity for the exchange. The taker fee applies when there is an immediate match, thus extracting some liquidity from the exchange.

Certain cryptocurrencies have their own associated fees. A common example is the Ethereum transaction fee, or ETH TX, which is assessed for every Ethereum transaction. The exact value of the fee varies depending on the characteristics of the trade. It’s not unusual for the exchange to make these fees part of each trader’s responsibility.

In all cases, a reputable exchange will be up front about the schedule of fees. If you can’t find this information easily, you might want to consider a different exchange.

How legit?

An information-just-wants-to-be-free sort of Internet doesn’t exist everywhere in the world, nor do laissez faire financial markets. In order to operate in certain jurisdictions, some exchanges opt to be regulated, just like other kinds of traditional exchanges. A regulated exchange needs to adhere to a strict set of laws and guidelines, and it often becomes very choosy about the types of activities that it permits. These exchanges also tend to attract a more traditional clientele.

If you’re looking to rub elbows with edgy types, maybe even the criminal element, regulated exchanges aren’t the best place to look. But regulation can mitigate certain kinds of risk or open up cryptocurrency trading to investors who wouldn’t have the opportunity otherwise.

How anonymous?

Speaking of the criminal element, some exchanges are quite popular in certain circles because you can trade on them anonymously, without giving out any sort of personally identifiable information, or information that can be traced back to you individually. You expose your digital wallet to the exchange as proof of your portfolio of digital holdings, but you don’t need to tell buyers who’s doing the selling, and they don’t need to tell you who’s doing the buying. Maybe this works for you. Maybe it doesn’t. But there are plenty of reasons for wanting to maintain your privacy that don’t have anything to do with being a criminal or hoping to evade your tax responsibility. You might not want to deal with identity theft. You might not be sure that you trust the exchange. You might not want to advertise your personal net worth.

Centralized and regulated exchanges tend not to give you the option of being mysterious. In order to trade on these platforms, you need to provide personal information and prove that you are who you say that you are by supplying valid forms of identification, like a state-issued driver’s license or a utility bill in your name.

Sometimes you can make certain kinds of basic trades after identifying yourself minimally, but if you want to have access to the full range of features on the exchange, you must complete the entire identification procedure. This is called Know Your Customer or KYC in the industry.

Fiat support?

Lastly, you should consider how you’re going to get money into and out of your cryptocurrency exchange.

If you don’t have the necessary computing power or time to generate (or mine) new cryptocurrency tokens, you’ll need to deposit fiat currency to convert into cryptocurrency for the purpose of trading. That means you should start with a fiat exchange, or an exchange that permits you to make local currency deposits. Not all of them do. Some exchanges are for trading cryptocurrencies only.

Along a similar line of reasoning, if you want to be able to spend your digital assets, you’ll almost certainly want to convert them to your local currency when it’s time for withdrawal. Since cryptocurrencies are still so new, being able to use them as money—as in paying with them like legal tender—is a use case that remains in its infancy. Passing them through a fiat exchange is usually the fastest way to go.

Keep in mind that you don’t necessarily need to perform all your trading activity on a single exchange. It’s probably better to start out that way. But experienced traders become adept at transferring cryptocurrencies among different exchanges to take advantage of special features or more favorable rates. A trade might occur on one exchange and get cashed out on another one entirely. But until cryptocurrencies gain wider adoption, a fiat exchange will tend to appear at either end of any exchange chain.

Also keep in mind that the cryptocurrency exchange might charge you fees for deposits and withdrawals.

How TimeX does it

So what does any of this have to do with the TimeX exchange that we’re building? We’re glad you asked. We’ve compiled the following table to show you how TimeX performs against the criteria that we identified and discussed above.

 

Exchange feature TimeX solution
Centralized or decentralized? Decentralized
What extra security? 2FA
Barebones or all the toys? Advanced trading capabilities, including limit orders, with customizable dashboards and notices
Which assets? BTC, ETH, TIME

Potentially all ERC-compatible tokens, other blockchains via DMT: NEM, WAVES, LTC, EOS, DASH

How much liquidity? High liquidity, with built-in market making
What fees? 0.075% for Taker
0.025% negative fee (award) for Maker
How legit? AML/CFT verification in full compliance with Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing
How anonymous? Supports fully anonymous trading, but identity verification is required to cash out in fiat currency
Fiat support? Yes (after beta launch)

So you get all the benefits of a decentralized exchange, with the added peace of mind of two-factor authentication. The fees are reasonable, too, with no added damage for withdrawals beyond the Ethereum transaction fee. And you can trade anonymously if you want, although you need to verify your personal information to withdraw fiat currency; more on that in a moment.

But maybe the most attractive aspect of the TimeX exchange is the responsive graphical interface with an intelligent dashboard and notification capabilities. It’s like having your own personalized digital assistant in an environment where you need a little personalized assistance. In the case of cryptocurrency trading, where conditions can change by the second, having a responsive, trader-centric platform is a welcome proposition. The technology isn’t quite ready to show you in its finished form, but when it is, we’ll have much more to say on this topic.

How verification works

Opening a trading account on TimeX is as easy as supplying a username and password. But TimeX is a regulated exchange, so to access all the trading features, you must complete your profile verification. There are four verification levels, plus a separate zero level that we assign to all new accounts.

 

Level Profile information
0 Username and password
1 Your profile photo, legal name, and date of birth
2 Your phone number and email address
3 Your identity card
4 Your physical address

You need to go through all four levels to be able to withdraw funds as fiat currency. But if you want to remain fully or partially anonymous, you can send us a lower level of verification information (or none at all, at your discretion) and still participate in TimeX trading.

What are you waiting for?

That knocking sound? It’s opportunity. Subscribe for our newsletter on ChronoBank website and be the first to know how we’re stacking the deck in your favor when it comes to success in cryptocurrency trading.

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