Cryptocurrency trading exchanges are NOT all created equal. Some are ok, some are dodgy and some are blatant scams that will steal your money. So it is vital that you know what you're getting into before you take the plunge and lose your money.
I started trading crypto in 2014, just after the world's biggest trading exchange Mt. Gox was hacked and 850,000 Bitcoins were stolen. It feels like ancient history now, but the shadow of that disaster still hangs over the world of crypto trading.
Takeaways
Choose a crypto exchange that suits your personal priorities
Don't store large amounts of money or cryptocurrency on any exchange for long periods
Sticking to the top cryptocurrency trading exchanges can help you avoid being scammed
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We must keep asking whether we can trust exchanges to protect our money from:
a) hackers
b) rogue exchange insiders
c) exchange bankruptcy
The answer is: NO
There is not a single crypto exchange in the world we can trust to protect us against all those risks. But with a little high-quality research, we can reduce our personal risk significantly.
Cryptocurrency trading exchanges split into two main types: centralized and decentralized (or 'DEX'). Centralized exchanges are usually owned and operated by a company. Decentralized exchanges are often just apps without any person or any company actually 'in charge'. They are simply computer programs that facilitate the direct peer-to-peer exchange of assets between different users.
The biggest exchanges such as Binance and Coinbase are all centralized exchanges, though that is starting to change fast, as DEXs like Uniswap and PancakeSwap are gaining popularity.
It's all about trade-offs - what's most important to you and what features you're willing to compromise on. Unfortunately I've yet to find a large exchange that doesn't regularly experience downtime during very busy periods. This is a problem that seems to afflict exchanges of all kinds including major stock exchanges, but crypto exchanges appear to be particularly guilty. This means people sometimes can't close their trades when markets are crashing (or open new trades). So you need to factor this in as a tail risk in your trading plan.
Keeping my money safe is my number one concern and I'm not willing to hand my bank or payment card details over to the first dodgy company that asks for them. So for several years now, when I'm exchanging crypto for fiat currency (British pounds in my case), I have only used Coinbase.
Why Coinbase? Because it was founded in 2012, it's an American company listed on the Nasdaq stock exchange, and it's regulated as a money transmission business. The Coinbase trading platform is not scrutinised for irregularities in the way a fully-regulated stock exchange would be, but as an incorporated American business, I trust it with my credit and debit card information. This does not mean I trust it enough to keep lots of my money on the platform for long periods of time. It's still just a business that could go bust one day or suffer a hack or insider fraud.
If you buy large amounts of crypto, the safe thing to do is to transfer it into a private crypto wallet app, protected by your 'private keys', passwords which you keep secret. For maximum security, many people buy a hardware wallet - basically a glorified USB stick - which of course can be disconnected from the internet and therefore from the grasping hands of potential hackers. Ledger and Trezor are the most well-known brands in this area.
You need to know the coiners maxim 'not your keys, not your coins'. This basically means you can't trust anyone with your crypto and if you have a lot of it, it's not a good idea to leave it on a centralized platform, even one as well-established as Coinbase. If Coinbase suffered a major hack or went bankrupt, there's absolutely no guarantee you'd get back any of the money you kept on the platform.
Meanwhile, because DEXs are just programs that allow you to swap different cryptos in and out of your own private wallet, the safe-keeping of your assets is usually less of a worry than with centralized exchanges. Though there are still risks during the trading process.
If privacy and anonymity are very important to you, then you will probably lean towards the DEXs, such as SushiSwap, Uniswap and PancakeSwap. Many popular centralized exchanges used to allow people to trade anonymously - and that is still the case to some degree - but financial regulatory authorities are now putting increasing pressure on the companies that run crypto exchanges to adopt KYC/AML ('Know Your Customer/Anti-Money Laundering) procedures. This means most of the biggest exchanges now ask for identification and attempt to verify their customers' real-world identities.
DEXs are far more difficult for the authorities to pin down because - in the spirit of 'true' crypto - many of them don't have anybody in charge.
I tend to gravitate towards the biggest cryptocurrency trading exchanges and the main reason is that they are - quite literally - where the action is. Their users dominate the pricing of cryptos, effectively setting the prices for all the smaller exchanges whose users are constantly playing catch-up.
Big exchanges usually have much greater 'liquidity', which basically means lots of buyers and sellers. This tends to bring buy and sell prices much closer together, producing a tiny 'spread'. Spread is particularly important for short-term traders because, for example, on a small exchange you might be able to buy a crypto for $1000 and then sell it again immediately for only $990, because there is a $10 spread between buy and sell prices (or 'bid' and 'ask' prices, as they're usually called). On a huge exchange like Binance, the prices might be $995 to buy and $994.99 to sell, a tiny $0.01 spread.
High liquidity also tends to mean your trade gets executed quickly and at the price you expected. Illiquid exchanges suffer from 'slippage' which means the buy order you place may be filled at a significantly worse price because the seller you expected to buy from has already sold to somebody else and there are no other sellers around willing to sell at that same price.
Illiquid markets are also much easier for 'whale' traders to manipulate. Their big orders can easily move prices around erratically.
The daddy of them all. It was only launched in 2017, but quickly became the largest crypto exchange in the world. Fast executions, relatively low fees, very high liquidity, huge choice of cryptos to trade. But the platform tends to go down during market crashes, making it impossible to close trades. It also has no proper headquarters and no regulation, so I never keep much money on the platform for long periods. Binance is also based largely on users relying on the stablecoin 'Tether' as a proxy for US dollars. The wisdom of keeping your money in Tether is a big subject for another time, but suffice to say it's dodgy as hell. Do not keep too much of your money in Tether, as it could crash one day.
Smaller than Binance by an order of magnitude but it's based firmly in the U.S. instead of in…er…nowhere like Binance. The naughty younger brother of Coinbase itself, Coinbase Pro allows you to transfer funds over from your main Coinbase account and trade on a proper professional exchange with competitive pricing and fees. Like Binance, the platform has a bit of a reputation for going down, just when you really really don't want it to.
I wish I could tell you "this one never goes down!"… but that would be a lie, so I won't. Kraken is smaller than Binance and Coinbase but has been going a long time and is based in the U.S., which makes it one of the more respectable and partially-regulated exchanges. The choice of cryptos to trade is not huge, but liquidity is generally good and execution is usually fast and reliable.
This platform goes all the way back to 2011, which is almost prehistoric in the crypto world. The main drawback is that it only offers a few dozen cryptos to trade. Fees are not very competitive either. But on the plus side, it's based in the UK and complies with money laundering regulations, which gives it some respectability. In fact, I'd probably trust it with my credit card details, but I wouldn't leave much of my money on the platform for long, as it's still vulnerable in the usual ways - hackers, rogue insiders or bankruptcy.
The biggest DEX and the only decentralized exchange on this list. It's new, it's exciting…and it comes with all the big pros and cons of DEXs listed earlier. Huge choice of cryptos to trade, but trading is slow and basic, with no bells or whistles. The big plus is your money never has to sit on a centralized exchange that you can't trust. You execute transactions directly from your private wallet.
So which platforms do I actually use myself? A mixture of all of them! When you're a high-rollin', big-stackin' crypto trader who smokes bank notes just for a quick high, it's simply not safe to keep much money exposed to any of these exchanges. There are risks to all of them. I live in the UK and we have a Financial Services Compensation Scheme so if my stock broker goes bankrupt and I lose my money, I'll be bailed out to the tune of £85,000. And if all my brokers go bust, I get up to £85k per broker. If my crypto exchange goes bust, I get nada, nothing, I get robbed basically. So I spread my money around, which is a hassle, but it may save me a lot of tears further down the line.
Q: Are cryptocurrency trading exchanges fully regulated?
A: No. Stock exchanges are usually properly regulated and their trading activities are scrutinised by the authorities in their home country. Crypto exchanges don't yet have that level of regulation and many of them are strongly suspected of market manipulation, faked trade executions and all sort of other nefarious deeds. The exchanges listed above are among the special few generally considered not so susceptible to these dark practices.
Q: How do I know if a crypto exchange is legit?
A: The best solution is to stick to the most popular exchanges, particularly if they've been on the scene for many years. Scammy exchanges pop up every day and are often gone the next, taking a chunk of cash from unsuspecting users.
Q: I've heard the UK financial regulator banned Binance. Can I still use it if I'm British?
A: You can still use Binance. News reports typically misrepresented the Financial Conduct Authority's warnings to Binance to clean up their act. The FCA isn't happy with Binance helping UK customers to borrow extra money for trading ('leverage'). But ordinary crypto trading is on Binance is not a problem.
Statements are the opinions of the author, who is a financial trader and often has positions in various cryptocurrencies.
Investing always involves taking risk. This article does not constitute financial advice. Always do your own research or consult a financial advisor to ensure investing is right for your specific circumstances.
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