There are many factors to consider, but three are paramount

Risk is an inherent facet of investing. And while the exchange(s) you choose may not significantly impact traditional investments, it can make an important difference when it comes to cryptocurrency. In fact, the right cryptocurrency exchange may help reduce volatility risk, make it easier to diversify client portfolios, and more. When searching for a platform, the three most critical factors to consider are security of funds, regulatory compliance, and liquidity.

Security

Security is the most important factor to consider when getting involved in the cryptocurrency space for a number of reasons:

  • Because they operate on decentralized networks, cryptocurrency transactions are irreversible. Once a payment is sent, there is no way to undo it.
  • When using an exchange, control of assets is given to a third party, so it is important to be sure protections are in place.
  • Accounts on an exchange may not be fully insured in the event of a hack. If an exchange claims to be insured it is critical to understand exactly what is covered in the event of a breach.

Different exchanges may focus on different criteria when speaking about the security of the exchange. Look for security features—like two-factor authentication, whitelisting and cold storage—that can help keep funds secure at the account level. One of the most important things to consider in the nascent crypto markets is the reputation of the exchange, whether or not they have been hacked, and who they use as their custodian.

A derivatives-based platform that does not interact with cryptocurrency networks may avoid the security issues involved with cryptocurrency exchanges—however, this option is not practical for every business use case.

Regulatory Compliance

Fiduciaries cannot afford to select an exchange that does not comply with current regulations. Exchanges that do not use basic Know Your Customer (KYC) and anti-money laundering checks during the sign-up process, for example, should raise a red flag.

Consider also whether an exchange is transparent about the owners and the team behind it. Typically, exchanges that are regulated in politically stable jurisdictions have people behind the platform who can be held accountable should something go wrong.

Additionally, selecting an exchange from the same country in which business is transacted may help to ensure compliance with any regulatory changes.

Liquidity, Fees, and Other Features

When it comes to comparing exchanges, liquidity and fees are critical to review, as they impact a company’s bottom line. For example:

  • An exchange with a large amount of trading volume may help to avoid slippage on trades
  • An exchange with lower fees will help cut the costs of doing business with the cryptocurrency world, as some exchanges charge withdrawal and deposit fees in addition to transaction fees


Other Factors

Of course, there are other factors that are worth considering, including:

  • Which cryptocurrencies and trading pairs are supported
  • Whether or not the platform offers the ability to exchange cryptocurrency assets for fiat currencies
  • How quickly assets can be traded after deposit
  • Niche features offered by exchanges that may fit specific use cases
  • What level of customer support is offered
  • What trading methods - app, web, phone, ATM, etc.

Becoming a digital asset investor requires choosing the right partner so that you can execute on a solid trading platform and start managing your risk appropriately today.

BitGo is focused on working with clients, partners, and regulators to deliver robust security, custody, and liquidity solutions that can help to reduce risk and increase transparency for your digital assets portfolio. For more information on BitGo, please visit www.bitgo.com.

FAQs

Q: What is a decentralized exchange (DEX)?

A: A decentralized exchange, or DEX, is a peer-to-peer (p2p) service which enables direct transactions of cryptocurrency between two parties, without third-party involvement. Unlike centralized exchanges, a DEX does not store users’ funds. Decentralized exchanges use smart contracts, and most are operated on the Ethereum blockchain.

Q: What is cold storage?

A: Cold storage is the offline storage of cryptocurrencies, typically using offline computers, USBs, hardware non-custodial wallets, or paper wallets that are safeguarded in secure locations.

Q: What is a trading pair?

A: A trading pair describes two cryptocurrencies (or a cryptocurrency and a fiat currency) which can be exchanged with one another, typically on a crypto exchange. For instance, the trading pair BTC/ETH means you can purchase bitcoin with ether, or vice versa. Many crypto exchanges offer a limited selection of trading pairs.