If you want to trade bitcoins or some other cryptocurrency, you will need to start using a cryptocurrency exchange. Such exchanges are similar to regular exchange offices where you can trade your local currency and get some foreign currency. Typically, you can find currency exchange offices at airports when you are leaving your country or are arriving to a foreign country. The exchange rates at such offices change frequently to reflect the changes in the market.
Bitcoin and other cryptocurrency exchanges operate in a similar way. A bitcoin exchange is the equivalent of an exchange service provided by a regular bank for the holders of regular currencies. The regular exchange is also known as a forex exchange. Forex is an abbreviation of forex exchange. When working with a bitcoin exchange, you may get an account with the exchange to hold funds in your local currency and trade the funds into bitcoins or altcoins. You can send bitcoins from that account to your preferred wallet, similarly to how you would send regular funds from your forex account into a checking or savings account.
How bitcoin exchanges work
A bitcoin exchange is typically a website, even though certain bitcoin exchanges as of the writing of this article are planning to open physical locations. For example, CoinOne, the third largest bitcoin exchange in South Korea, has opened a physical location in September of 2017. The location supports trading of six digital currencies, including bitcoin, bitcoin cash, and ether. The exchange has a bitcoin ATM, a large display of latest market information and consultants that help visitors complete their cryptocurrency transactions. The exchange is located in Yeouido, in the southwest part of Seoul, South Korea’s capital. It is open from Monday through Friday, 10 am to 6 pm.
In the fall of 2017, Mexican company Bitlem announced its plans to open a physical bitcoin exchange location one block away from the Mexican Stock Exchange. The company plans to allow its customers to trade 11 various digital currencies using the location. It will be the first physical exchange for digital currencies in the country.
Choosing an exchange that’s right for you
Because there are so few physical locations that permit digital currency trading, most likely you will need to choose a bitcoin exchange that has an online presence. Before you decide on an exchange to use, you need to do your research. Choosing the first exchange that you see on Google or other search engine can be a recipe for disaster because when it comes to cryptocurrency exchanges, there are plenty of options and in many countries exchanges are not regulated by the authorities. For example, the State Bank of Vietnam announced that bitcoin is an illegal currency and using it as a means of payment is illegal and subject to punishment in Vietnam. At the same time, the country doesn’t view bitcoin trading as an illegal activity. Vietnam considers cryptocurrency trading to be a form of virtual currency trading, which is not illegal, and the country is home to two bitcoin exchanges that are perfectly legal and work without any restrictions.
Because the world of cryptocurrencies is so new, people that run bitcoin exchanges can range from serial seasoned entrepreneurs viewing their exchanges as a serious business to developer amateurs coding in their spare time.
The first factor you need to consider is whether an exchange you are considering meets your trading needs. One of such needs may be a possibility to safely transfer funds to the exchange from your bank account and back, making funds available in your exchange account and allowing you to transfer funds in cryptocurrencies from the exchange wallet to your digital currency wallet.
Do your due diligence
Start with doing some due diligence on the exchanges that you are considering. So a Google search for “Exchange X fraud” and “Exchange X scam.”
When looking at the complaints, pay attention to their dates. Many of the exchanges are experiencing “growing pains.” Many of the users are new to the world of cryptocurrencies. They may complain simply because they didn’t read all the rules and they want things to happen here and now even though the exchange was upfront with them from the very beginning about how it works.
There are three things that typically happen with reasonable legitimate complaints about bitcoin exchanges on forums such as BitcoinTalk. First, a thread with a complaint gets a lot of responses. This typically happens when a person complains that he or she didn’t get a bank transfer in, say, three weeks, and a similar scenario happened to others, which is why they feel compelled to respond and write about what happened to them. This is very different from a complaint from one person that is not getting any traction. Second, responses in the forum are from people with high reputations, not from the trolls with accounts created in the last few days. Third, the thread with the complaints becomes popular and gets several pages of posts within a few days. That’s how you can know that you are looking at a real issue. Once someone brings a real problem up, it is hard to keep the lid closed because more and more people will start sharing their own horror stories and complaints.
Another simple yet effective way to find out about the reliability of a cryptocurrency exchange is to simply ask about it in the forum. Typically, you will get an answer from a few minutes to a few hours later.
In addition to doing due diligence, you want to look at what incentives a cryptocurrency exchange provides for joining it. You want an exchange that either provides no incentives or provides very few incentives, which means that it is likely to be an established exchange not using freebie incentives to attract new customers. While there is nothing wrong with this method of customer acquisition, an exchange that allows users to trade for free is likely to start experiencing “growth pains” at some point and you do not want any part of that. Such an exchange is also likely to have low liquidity, which means that if you are looking to trade large amounts, your behavior will have a significant impact on the exchange and things will get more expensive for you quickly. For these reasons, you want to avoid such exchanges and let others use them, bring up the volume, and test the exchange. While it is true that things in the world of cryptocurrencies are changing quickly, you don’t want to spend your time and resources to have someone use you as a guinea pig while they are figuring things out in their ventures.
Exchanges that you really want to avoid are those that promise “interest” as an incentive. The interest on such exchanges can come in a variety of forms. One of such forms is an exchange paying you to hold your money. Other forms include bonuses for helping exchange have liquidity, use your account and so on. When an exchange offers something like this, it means that it is planning to use your money for some external purposes or is simply a scam. Running an exchange that offers interest on deposits makes no economic sense. This is not how exchanges make their money.
Does an exchange offer great customer service?
Another great indicator of the reliability of a cryptocurrency exchange is the level of customer service it provides to its users and prospective users. Mt. Gox, which was the largest bitcoin exchange in the world before going bankrupt in 2014, has terrible customer service even before it started experiencing problems. To this day you can see messages on the forums about having funds stuck with Mt. Gox for weeks and the exchange not doing anything about it. The level of customer service will tell you two things. The first one is how serious the team behind the exchange is about their business. A team that wants to build a business that’s viable in the long term will invest in great customer service from the very beginning because the success of any business depends on the happiness of its customers.
The second reason why you want to pay attention to the level of customer service is that this level will show you how well funded an exchange is. Maintaining helpful and knowledgeable customer service costs money, which means that if an exchange invested in great customer service, it had financial resources to do so.
You will be able to tell if customer support is actually trying to help you or if it believes that its job is to stall and deflect your concerns within just a few messages. While most exchanges are likely to outsource their customer support, working for a shady company would quickly wear out a person from any country, which is why good customer support agents tend not to work for disreputable companies.
For these reasons, contact support before you open an account with an exchange and see what happens. If the exchange can’t provide satisfactory service before you decide to trust it with your funds, becoming a user of the exchange is definitely not a good idea.
Also, pay attention to where an exchange is registered. The days when most cryptocurrency exchanges where registered in Belize and Cyprus are over. Today there are exchanges with registrations in New York, such as Gemini, and San Francisco, such as Coinbase. Chances that nothing will go wrong are much higher when an exchange has registration in a country with well-established financial regulations such as the United States or the United Kingdom and you can easily find more information about the founders of the exchange. Owners keep their identities secret are a big red flag. Just like all other entrepreneurs, cryptocurrency entrepreneurs who build quality products and services have nothing to hide.
Finally, remember about the golden rule of investing in cryptocurrencies, which is to never allow your coins to stay in your exchange account for a long time. Cryptocurrencies are still a relatively new field and because of this, exchanges sometimes fall victims to hacks. History has precedents when even the best-funded exchanges run by honest cryptocurrency entrepreneurs have been hacked, which is why you should always stay in control of your cryptocurrency funds.