A currency ecosystem that existed entirely on digital platforms, without the endorsement and acknowledgment of any governments was considered a scientific and technological marvel in 2009. However, with the introduction of bitcoin by Satoshi Nakamoto in the same year, it turned out to be a groundbreaking reality, thanks to blockchain technology. The cryptocurrency was no longer a concept but something that became an integral part of the tech world. At the time of writing this blog, the number of cryptocurrencies, as inferred from investor.com, operational is 2995… just a small step closer to reaching the landmark 3000. With the growing number of cryptocurrencies, a cryptocurrency exchange platform becomes inevitable to facilitate the exchange of values between these. In addition, as of now, cryptocurrencies are not being used as mainstream modes of transaction, but they only find their relevance in changing – making a cryptocurrency exchange software even more relevant.
Cryptocurrency exchanges are sprouting left right and center, thanks to the growing acceptance of cryptocurrency and the acknowledgment of the awesomeness of blockchain technology. The growth in numbers has proportionally increased the possibilities of fraud and malicious practices. It becomes increasingly important for an investor to exercise their due diligence in finding the right exchange, so they can invest safely and reap their returns.
We have given below, a few critical pointers to fight out if the exchange is trustworthy and safe:
The location of incorporation
We did talk about the growing acceptance of crypto and blockchain. However, not all countries and jurisdictions have been quite welcoming towards this new technology. Some of them have been quite generous and warm in accepting and acknowledging the relevance of cryptocurrency and blockchain.
Countries like Lithuania and Malta have been spearheading the global crypto revolution and have even gone to make changes to their traditional financial ecosystems. When it comes to the US, it varies between states. On paper, it might seem like an ideal way to use a VPN to circumvent the nonavailability of exchanges in your location. However, it is to be remembered that if at all you face some legal issues, the jurisdiction in your location plays a vital role in ensuring that you get the deserving legal recourse. This simply translates to you losing your funds!
Coinbase, Bittrex, and Gemini can be quoted as good examples of regulated crypto exchanges in the United States. The latter two offer a facility to trade between fiat and crypto. Coinbase, however, is considered the primary choice for newbies considering its simple UI. There is also a provision that is made available for experienced traders.
Maybe blockchain technology is one of the most secure digital ledgers, but it does not mean that it is completely immune to any compromises. In fact, some of the most dubious compromises in the crypto space have been in digital exchanges.
The very mention of the word ‘Hack’ and ‘Digital exchanges’ immediately conjures up memories of the Mt. Gox Exchange hack in 2014. The hack resulted in a loss of 740,000 bitcoins, which was equal to $430 million at that time. Recently, a Canadian exchange admitted that it had lost more than $137 million in cryptocurrency after its founder died. The reason is interesting to note – since the founder did not leave the private keys with anyone, all the money disappeared with him, technically being taken to the grave along with him!
There have been speculations if the Canadian incident is an exit scam. However, all these instances only put a mandate on the importance that needs to be given to security. The exchanges should store funds in cold storage with security measures like multi-signature access. There should be a facility for protecting funds through insurance – making the legality of the exchange matter more.
It is to be noted that no exchange is completely safe from security compromises. Therefore, it is best for you to store your cryptocurrency, preferably in hardware-based cold wallets, and take them to the exchange only at the time of trading.
Classically, liquidity is defined as the ease with which you can convert an investment or an asset into cash. In the crypto world, liquidity equates to trading volume. If the trading volume is high, it means that the possibility of your exchange being profitable is proportionally high.
Large exchanges might have extremely stringent requirements that might serve as deterrents for smaller projects in getting listed. Considering this scenario, small projects find their listings only in small exchanges. Therefore, liquidity has to be handled with a pinch of salt.
Exchange fees and exchange rates
Exchanges make money by charging a small boat with the maker and the taker. If the trading volume is high, the percentage of the fee is low in relation to the transaction. However, some exchanges are simply more expensive than others. Coinbase, as we have talked about earlier, can be a good starting point for amateurs, but pro-traders tend to avoid this exchange because of its high fees. Binance can be considered one of the best options when it comes to this particular aspect.
The user interface makes or breaks a product, and the crypto exchanges fall into the same category. It is to be noted that people who use crypto exchanges are not technocrats, but investors who understand cash more than code! The charts, the tables, and the candlesticks might be useful information for a pro trader, but a beginner might find them confusing and dizzying.
In addition to UI, accessibility is another important factor. The exchange should be accessible from your smartphone, and if possible, there should be a dedicated mobile app for the exchange, making it simpler and easier to use.
The number of transactions is proportional to the number of support requests that an exchange will get from customers. The customer support system of the exchange should be robust and always available – one of the flipsides of crypto exchanges operating 24/7. It would be better if the support is available in multiple languages.
Good customer support, and in the same magnitude, bad customer support has been picked up as one of the biggest discussion points in crypto communities. Therefore, offering good support goes a long way in even passively marketing your exchange in the right pockets!
Reputation and authenticity
It is one of the most overlooked factors, and the list deserves to be wrapped up with this particular point. Since the crypto ecosystem is largely unregulated, the barriers to enter the exchange market are almost close to none, and anyone can enter the exchange business. This opens up opportunities for scamsters to exploit the curiosity and greed of people. Therefore, it is the responsibility of the investor to perform due diligence on the exchange.
The first thing to do is to check the legal status of registration. You will also need to take into consideration the credentials of the founding team, and factors like a physical address as opposed to a simple post box number. Any activity that compromises the authenticity and reputation of your exchange is bound to get amplified on platforms like Google and Reddit.
The factors listed above will surely let you know the magnitude with which you can trust and exchange. At the same time, it also opens up opportunities for aspiring crypto entrepreneurs to set up their own exchange compliant with these requirements.
Should you have this entrepreneurial thirst to set up your business using a crypto exchange, you can contact cryptocurrency exchange development companies that specialize in providing white label solutions. It will ensure that you do not spend a lot of time and money in setting up the exchange, and you can also be assured that the basic functionalities are in place without any compromises.
Disclaimer: This is a guest post. KryptoMoney does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. Readers should do their own research before taking any actions related to the company. KryptoMoney is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in the article.