In order for you to start trading cryptocurrency, you have to purchase cryptocurrency and open an account with an exchange. An exchange provides users with access to a trading platform that enables them to buy and sell digital currencies. Opening an account with a cryptocurrency exchange is similar to opening a bank account. It can require paperwork and steps such as identity verification. The whole process can take a few days depending on who you decide to go through. If you’re just looking to test the waters, some exchanges offer paper trading accounts that require minimal information to open. A paper trading account allows you to practice trading with “play money” until you’re ready to start with real money.
Purchasing cryptocurrency can be done directly from some exchanges, or purchased from other sources and sent to an exchange wallet. You can use other sources like CashApp, Crypto.com, Paxful, or even go to a local Bitcoin ATM. Most places you purchase Bitcoin from may require some form of identification and that is normal. Just be sure you are only giving your information to someone you trust.
Ultimately it is your responsibility to choose a source to obtain cryptocurrency and an exchange to trade on. Keep reading to know what to look for when choosing an exchange.
There are a lot of things you want to consider when selecting an exchange to trade on. The number one priority when choosing an exchange is a high level of security. You want your money to be safely deposited with an exchange that has many security measures. Some good safety measures are 2 factor authentication, PIN protection, and log in verification codes via email or text. There are other additional safety measures that exist for different exchanges. You may want more or less security depending upon how much you will be trading with.
Let’s talk about transaction costs. The biggest transaction costs in cryptocurrency trading comes in the form of commissions or the dealing spread. Every time you execute a trade you will pay either a fixed commission on the trade or you will pay via the exchanges bid/ask spread. Commissions and spreads are how cryptocurrency exchanges earn a profit on their business. Exchanges can be categorized as having three types of spread/commission structures – fixed spreads, variable spreads, and commissions only.
- Fixed spreads are commissions paid on a fixed spread between the ask price and the bid price.
- With variable spreads, the spread between the ask and bid prices can change according to the demand for the currency in the market. Under this model the spread often widens when there is greater liquidity in the market, such as expected news events that might provoke price movements.
- Exchanges that only charge you commissions tend to take a small percentage built into the wider spread. In this case, the broker takes a percentage that could amount to only a fraction of a percentage. The broker then leaves the remainder of the spread to a larger market maker with which he’s working. This type of commission can allow traders to pay a lower cost to make trades on a given currency pair.
No matter what kind of trader you are, like it or not, you will always be subject to transaction costs. Every time you enter a trade you will have to pay a fee. It’s natural to look for the most affordable and cheapest rates. You don’t want to sacrifice joining an exchange with poor execution or one that isn’t safe for lower transaction costs. Make sure you know how tight your spreads must be based on your trading strategy so you can review available options. There should be a healthy balance between transaction costs and other criteria that you consider important when comparing exchanges.
Leverage is the loan provided by the exchange that can be used to open significantly larger trades than your account would allow. By applying a x50 leverage, for example, a trader with an account size of $1,000 can hold a position of $50,000. Leverage can magnify gains on winning trades, but it can also magnify losses on losing trades.
Cryptocurrency exchanges offer a varying assortment of leverage caps, and these caps are based on the amount of crypto each exchange has staked. For example, when trading BTC/USDT on Binance’s exchange, the maximum allowable leverage is x125. Some exchanges can offer leverages up to x1000.
If you apply risk management rules, you will be fine signing up to an exchange that only offers x25 leverage. If you are a beginner, using high leverage will blow your account quicker than it will make you a millionaire.
Deposits and Withdrawals
Every cryptocurrency exchange has their own policy in regards to depositing and withdrawing funds. It’s important that you understand this policy to avoid any confusion or delay in setting up your trading account or withdrawing funds when you need to.
To open and fund a live account, an exchange may allow you to deposit funds directly to a wallet address. They may also accept credit card, wire transfer, PayPal, business or personal checks, or a host of other options.
Withdrawing funds can typically be done using similar methods as depositing funds. Keep in mind that there may be withdrawal fees or other fees that apply. In addition, you may have to wait a few business days before the withdrawal request is processed. Make sure that both the deposit and withdrawal policy of the exchange you choose is in line with your expectations.
A great crypto exchange should also have great customer support. Being able to reach your exchange’s support team when you need to is a must. This is particularly true if you’re a beginner trader that requires some guidance during the early stages of your learning. It can be very frustrating to be on hold for long periods of time, or worse, not be able to contact your exchange directly when you have a question or require immediate attention.
When choosing an exchange you should only consider those that have 24 hours a day, 7 days a week support. If English is not your primary language then you may want to find an exchange that offers support in your first language.
You should expect your exchange to be accessible to you and assist you in any manner related to their service. Remember you are the exchange’s customer and you should get the assistance you require in an acceptable period of time.
When choosing a cryptocurrency exchange, the most important thing is not to end up at a dishonest one. Take your time when choosing an exchange; the trading opportunities are not going anywhere. There are hundreds of exchanges out there. If you don’t like the one you have now, you can always leave and look for something better.
Learning how to choose a crypto exchange takes some skill and practice. Go through the steps we described and your odds of finding a good exchange increase significantly. Having said that, here are my recommendations:
Click here to discover Binance, the world’s largest exchange by volume.
Written by Edward Gonzales © Crypto University 2021