To begin, this article will give you 10 actionable tips to find a good bitcoin exchange. Spotting the scam exchanges is not always possible, especially as many of them either start life with good intentions or make a lot of effort to seem legitimate.
What’s more, many exchanges that are considered legitimate within the crypto community have some very questionable practices which have resulted in them being dragged before the courts.
But, with all that said, we still need a place to buy bitcoin. Plus, there are steps that help you discern whether the exchange you want to use is good. They are described below.
Know Your Customer
Commonly abbreviated to KYC, these are checks an exchange does to ensure the people using it are who they say they are. This prevents criminality on the exchange. If an exchange doesn’t verify your identity, then stay clear as this is something all respectable exchanges should do.
How Often They’re Hacked
With the exception of CEX.IO and several more platforms, pretty much every exchange has been hacked at least once. This isn’t a surprise as exchanges hold a lot of cryptocurrencies and it is more lucrative for hackers to target one exchange and get a huge haul than target lots of individuals and get small rewards. If an exchange has faced multiple hacks – stay well clear.
Check Online Forums
One of the best cryptocurrency resources, in general, is online forums like Reddit. Here you can ask other crypto users which exchanges they use and recommend and also find out if an exchange has faced problems and should be avoided. Always look at what others say about an exchange, if something doesn’t seem right – then it probably isn’t.
Some exchanges are partly regulated, and many operate in a completely unregulated framework. The more an exchange submits to regulation the more they have to be transparent about their business dealings and the more transparent they are. It is easy for an unregulated business to hide criminal or fraudulent activity so look to see how closely your exchange works with regulators.
Look at the Fee Structure
This is one of the biggest tell-tale signs of a bad or poorly run exchange. If the fees for transacting on the exchange seem very low or are non-existent then you have to ask yourself, how this exchange is making its profit? If you can’t immediately see how exchange makes money, then avoid it because of the chances that you’re going to be exploited somewhere along the way.
Only a few exchanges do this, but these can be invaluable when assessing whether or not an exchange is out to rob you or looking to build a healthy relationship with you as a customer. The option to practice and use dummy money means that exchange is happy to show you behind the scenes without you putting down any money. It’s not fool-proof, but it goes a long way in reassuring prospective customers.
Exchanges will partner with cryptocurrencies and other businesses to offer more services. An exchange mentioned earlier, CEX.IO, has financial standing in the UK to be part of the faster payments scheme for example. Look at how your exchange is viewed in the wider business and financial community. If an exchange has no partnerships or is partnering with other risky businesses, it gives you an idea about their credibility.
This isn’t the be-all and end-all, as theoretically an exchange could open tomorrow and be the best and safest exchange ever – the key here is that even if that did happen, time will tell. Look at how long an exchange has been operating and look at the track record during that time. Has the exchange been established for a number of years with few problems? If so, this is likely a very good sign.
If an exchange is young and untested then avoid it. If an exchange is young and has had a lot of problems, avoid it as well.
Some platforms, networks, and exchanges ask for more information than they ought to. Before signing up for any exchange it is worth looking at the general guidance of what information to share and what not to. Sharing private keys is a big example of when you should avoid a service, no matter how reputable it seems.
Another thing to be wary of is sharing financial or personal information that is unrelated to trading cryptocurrency. If an exchange is asking for all of your banking data including passwords etc. you should be having sirens go off in your head to not proceed further.
Most exchanges offer some kind of free wallet and all of them have a collective wallet that is used by the exchange itself (this is the one that hackers tend to target). A good exchange will allow you to easily remove funds and store it on a third party (hardware) wallet without putting in barriers to do so. If you feel like you don’t have the option to protect your investment with your exchange, then find a new one.
Staying Safe in General
This list isn’t exhaustive and learning how to navigate the tricky world of cryptocurrency will take hours of research and reading. There are some basic principles that you should be aware of in general.
- Follow the “not your keys and not your Bitcoin” principle and don’t give out keys or Bitcoin.
- Use a multicurrency hardware wallet like Ledger and never keep funds in an exchange wallet unless transacting at the time.
- Transact on reputable exchanges like CEX.IO.
- Don’t invest in ICOs without spending considerable time researching and figuring out if it will work as a product.
Doing these things will help you trade safely.