BY DR SOHA MAAD
Introduction
This article is a brief guide for investors to choose the best crypto exchanges. The article starts with a brief overview of the various ways to invest in crypto currency, and then focuses on investing using a crypto exchange. The guide covers the important criteria to choose a crypto exchange, the various types of available crypto exchanges, crypto exchanges fees, the various approaches for ranking crypto exchanges, how crypto exchanges works, and the pros and cons of using crypto exchanges. The article also covers alternative approaches to invest in crypto currencies without using a crypto currency exchange, and focuses on the use of crypto wallets. The article establishes a comparison between investing using a crypto exchange and the alternative approach of investing using a crypto wallet. The article concludes with road ahead for Arab banks and authorities to establish regional research centres for crypto exchange market intelligence. The centres will carry the tasks of gathering data about world crypto exchanges, developing various approaches and methodologies to rank crypto exchanges, making available more resources to educate investors on using crypto exchanges, and playing a key role at national and global levels to regulate the crypto exchange market and put standards for ranking and evaluation of crypto exchanges worldwide.
Investing in Cryptocurrency
According to Investopedia, investment in cryptocurrency can take many forms, ranging from buying cryptocurrency directly to investing in crypto funds and companies. For direct investing in crypto coins, investors can buy cryptocurrency using a crypto exchange or through certain broker-dealers. Transaction fees for making crypto purchases can vary widely among currencies. Investing in cryptocurrency is risky, so it is important not to invest needed money.
Various ways for investing in crypto currencies include:
- Buying cryptocurrency directly: cryptocurrency can be bought directly by using a cryptocurrency exchange.
- Investing in cryptocurrency companies: The cryptocurrency companies may have partial or total focus on cryptocurrency.
- Investing in cryptocurrency-focused funds: This is an alternative option to investing in individual cryptocurrency companies.
- Investing in a cryptocurrency Roth Individual Retirement Account (IRA): This investment option is chosen to get the tax advantages of an individual retirement account (IRA) and to get more secure storage for cryptocurrency holdings.
- Becoming a crypto miner or validator: The most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators earn rewards in crypto, which they can either hold as investments or exchange for another currency.
INVESTING USING A CRYPTO EXCHANGE
A crypto exchange is a marketplace to buy and sell cryptocurrencies, like Bitcoin, Ether or Dogecoin. Cryptocurrency exchanges work like other trading platforms. They provide users with accounts to create different order types to buy, sell and speculate in the crypto market.
Some crypto exchanges support advanced trading features like margin accounts and futures trading, although these are less commonly available to users in the United States. Others have features like crypto staking or crypto loans that allow users to earn interest on their crypto holdings. Some exchanges offer educational materials to keep users up to date about the crypto world.
Criteria to choose crypto exchange
According to Forbes, important considerations when choosing a crypto exchange are:
- Accessibility: Some locations may prevent users from buying and selling crypto on certain exchanges due to state or national regulations. Some countries, like China, have banned citizens from accessing crypto exchanges.
- Security: Cryptocurrency is not backed by any central institution, and cryptocurrency holdings are not protected in the same way as money in the bank or traditional investments. Some exchanges have insurance policies to protect the digital currencies users hold within the exchange from hacking or fraud. Coinbase, for example, has an insurance policy worth $255 million. Others, like Kraken, rely on their security practices to protect clients rather than insurance policies.
- Fees: Exchange fees may be a fixed price, but are often a percentage of the trade. Some exchanges, like Cash App, charge fluctuating fees based on price volatility. Fees are often charged per transaction, and can differ whether the user is the seller or the buyer. There may also be different fees depending on the currencies traded.
- Liquidity: Exchanges should have enough trade volume to ensure users’ holdings are relatively liquid, and can be sold when needed. A high trading volume on the exchange means that users have a higher chance of buying or selling their crypto holdings at the best price.
- Coins offered: Not every exchange offers each of the thousands of cryptocurrencies that exist.
- Educational tools: A big priority for crypto beginners when it comes to choosing an exchange is the opportunity to learn more about different coins, digital assets, and blockchain technology. Coinbase exchange, for example, offers rewards for learning about new coins through its Coinbase Earn program. In exchange for watching videos and completing quizzes related to different coins, Coinbase rewards users with a small portion of the crypto, which they can then hold or convert to something else. Others offer courses and articles on site to help learning about crypto markets, history, and innovations, such as Gemini’s Cryptopedia or Binance Academy from Binance.
- Storage: An exchange that allows users to keep their crypto within their online account can be a good choice, especially for beginners. At a later stage, users can keep their crypto in their own wallet.
- Tax information: Crypto trades should be reported as capital gains on tax return.
- Additional considerations: There are additional factors to be considered based on user preferences, like customer support, mobile app, and how easy the exchange is to use overall, the fee structures and the security measures.
TYPES OF CRyPTO EXCHANGES
According to Nasdaq, There are currently three types of exchanges as detailed below:
- Centralized Cryptocurrency Exchanges (CEX)
Centralized cryptocurrency exchanges are similar to traditional stock exchanges. The buyers and sellers come together and the exchange plays the role of a middle-man. In the crypto-world, “centralized” means to trust somebody else to handle your money. One of the main issues with centralized cryptocurrency exchanges is their vulnerability to hacks.
- Decentralized Cryptocurrency Exchanges (DEX)
A Decentralized cryptocurrency exchanges (DEX) does not rely on a middle-man to hold users’ funds. It is a marketplace where buyers and seller come together and process the transactions directly between one another. DEXs facilitate peer-to-peer trades. Decentralized cryptocurrency exchanges are harder to hack. However, users are more vulnerable to locking themselves out of their money. Other problems with DEXs may include low volumes and low liquidity due to lack of popularity at the moment.
- Hybrid Cryptocurrency Exchanges
Hybrid cryptocurrency exchanges, are known to be the next generation crypto trading marketplace. They aim to merge the benefits from both centralized and decentralized exchanges. More specifically, hybrids seek to provide the functionality and liquidity of a CEX with the privacy and security of a DEX. Many believe that such exchanges are the future of cryptocurrency trading.
Crypto Exchanges Fees
There are various types of fees for buying and selling coins in a crypto exchange:
- Trading Fees: Trading fees may be charged as a flat percentage of the amount of crypto you buy or sell, or an exchange may differentiate between orders that are makers and those that are takers, charging a different percentage accordingly. Makers orders add liquidity to an exchange, meaning they do not fulfil standing orders. Takers orders, meanwhile, remove liquidity from an exchange by completing orders that are waiting for a trade. Depending on the exchange, maker fees are usually slightly less than taker fees, but this is not always the case.
- Withdrawal Fees: Many exchanges charge fees to withdraw coins from their platform. This can be an issue if investors prefer to move their crypto to a secure third-party wallet or onto another exchange. Withdrawal fees typically vary by cryptocurrency.
- Other Fees: In more advanced trading strategies, like margin trading, there are additional fees associated with borrowing money. Beginner-friendly exchanges like Coinbase and Gemini offer quick buy features that charge higher fees. These fees can be avoided by learning how to buy and sell on an exchange’s trading platform. If you make purchases using a credit card or debit card, you may be charged a premium by both the exchange and your card issuer.
RANKING CRYPTO EXCHANGES
Various approaches can be used to rank crypto exchanges. These include:
Ranking By Volume
Crypto Exchanges may be ranked by trading volume and market capitalization. Some platforms, like coinmarketcap.com, provides regular updates of crypto exchanges ranking based on 24 hours trade volume.
Table 1. Ranking crypto exchanges by trading volume
|
# |
Name |
Exchange Score |
Volume(24h) |
Avg. Liquidity |
Weekly Volume |
|
1 |
Binance1 |
9.9 |
$18,971,511,46322.94% |
904 |
16,330,4 |
|
2 |
Coinbase Exchange2 |
8.0 |
$2,179,333,77334.44% |
731 |
1,151,029 |
|
3 |
FTX3 |
8.0 |
$1,692,093,35830.04% |
753 |
2,320,741 |
Source: coinmarketcap.com
Ranking according to selected criteria
Cryptocurrency trading exchanges may also be ranked according to selected criteria. For instance, Forbes and Investopedia have their own selected criteria to rank cryptocurrencies.
Forbes Ranking
Forbes ranks crypto exchanges according to key variables. In 2022, Forbes performed an in-depth assessment of the features and options offered by nearly 25 cryptocurrency exchanges, crypto trading apps and brokerage platforms that offer crypto trading options. Forbes used 10 key variables to assess the quality of each crypto exchange trading platform:
- Basic Trading Features.Key metrics included the number of cryptocurrencies available to trade, the number of fiat currencies accepted, the exchange’s overall liquidity and trading fees.
- Advanced Trading Features.Forbes looked at the availability of complex trading features like advanced order types and volume discounts for frequent trading.
- Margin Trading.Is an assessment of margin trading rates.
- Platform Availability.While some of the best crypto exchanges are available everywhere, others have widely varying degrees of accessibility of different features in various countries and in the United States.
- Customer Service.Is measured according to the available types of customer support.
- Educational Resources.Forbes evaluated the educational content offered by each platform.
- Crypto Rewards Credit Card.Some platforms offer crypto rewards credit cards.
- Security and Storage.Forbes assessed the types of storage options, security and insurance available, and any large-scale hacks of each exchange over its lifetime.
- Staking and Rewards.Some platforms allow users to stake selected cryptos and earn interest payments.
- Crypto Lending.Some crypto exchanges allow users to lend out their cryptocurrency.
Forbes surveyed the above ten variables benchmark features and options across the crypto exchanges and brokerages. For each ranking, the sum of weighted values across all or some of these key factors was calculated to award each brokerage or exchange its overall rank. Margin trading, platform lending and advanced trading were not considered for choosing the best crypto exchanges for beginners.
Table 2. Forbes ranking of crypto exchanges according to key variables
|
Crypto Exchange |
Coins Available (in the U.S.) |
Available in all 50 States? |
|
Binance.US |
100+ |
✘ |
|
Bitstamp |
60+ |
✘ |
|
Bitflyer |
9 |
✘ |
|
BitYard |
45 |
✔ |
|
Coinbase |
150+ |
✘ |
|
Crypto.com |
250+ |
✘ |
|
FTX.US |
27 |
✘ |
|
Gemini |
120+ |
✔ |
|
Kraken |
120+ |
✘ |
|
KuCoin |
600+ |
✔ |
Source: www.forbes.com › investing › cryptocurrency
Investopedia Ranking
Investopedia selects best crypto exchanges based on fees, supported coins, wallets, as well as other criteria. depending on the exchange and the level of verification required.
Investopedia selects best crypto exchanges based on factors such as supported assets, fees, payment methods, and security
Table3. Investopedia choice of best crypto exchanges according to selected criteria
|
BEST CRYPTO EXCHANGES OF 2022 |
|
Best Mobile App: Crypto.com Best for Security: Gemini Best for Altcoins: BitMart Exchange Best for Low Fees and Best for Experienced Traders: Kraken Best for Bitcoin: Cash App Best Decentralized Exchange: Bisq |
Source: Investopedia
RANKing BY TRUST SCORE
Some platforms, like www.coingecko.com, ranks crypto currency exchanges by trust score.
Table 4. Ranking crypto exchanges by trust score
|
# |
Exchange |
Trust Score |
24h Volume (Normalized) |
24h Volume |
|
1 |
Coinbase Exchange; Centralized |
10 |
$2,204,292,705 |
$2,204,292,705 |
|
2 |
Bybit; Centralized |
10 |
$1,274,797,001 |
$1,274,797,001 |
|
3 |
FTX; Centralized |
10 |
$917,674,351 |
$1,703,093,920 |
Source: www.coingecko.com
HOW CRYPTO EXCHANGES WORKS
When users set up an account with a crypto exchange, this enables them to buy and sell cryptocurrencies like bitcoin (BTC), ether (ETH), litecoin (LTC), polkadot (DOT), dogecoin (DOGE), and other coins. Depending on the exchange, users can purchase crypto using a fiat currency like the United States dollar, or trade one form of crypto for another.
To begin trading, users need to fund their exchange account (sometimes called a wallet). It is generally recommended that users set up their own crypto wallet for greater security.
Users can then view the trading prices of different crypto. The exchange does not set the prices; they are determined by the market, and most exchanges reflect up-to-the-minute pricing, although there can be slight differences among exchanges owing to the fact that cryptocurrencies are decentralized.
Users can then place a buy order to purchase bitcoin, ether, etc., and the order is added to the order book along with other buy and sell orders. Depending on which type of platform is being used (an exchange, investing app, or cash app), the view of Exchanges and online brokers generally charge fees for their services. Unlike traditional markets, where many fees have declined in recent years, crypto trading typically costs more. It is not uncommon to see fees as high as 5% per trade or more, for example, although many can be much lower: 0.5% or less per trade.
Pros and Cons of Crypto Exchanges
Some of the pros of using a crypto exchange include:
- It is easy and convenient for new users.
- It allows purchasing and selling of crypto in a somewhat regulated environment.
- Some exchanges provide users with tax forms, making it easier to calculate crypto taxes.
Some of the cons of using a crypto exchange include:
- It is vulnerable to hacking, fraud, or theft.
- If the exchange goes down, users can not access their funds or place trades.
- Individuals who use the custodial exchange wallet do not hold their private keys.
Trading CRYPTO currencies WITHOUT AN EXCHANGE
Trading on an exchange is not for everyone. The technical know-how required can set a high bar. And some exchanges might follow the KYC (Know Your Client) protocol, which requires users to share personal information and identification, similar to traditional exchanges. Other options for trading cryptocurrencies include.
- Investing apps: Many online investment brokers offer apps that also enable users to buy and sell cryptocurrency.
- Cash and payment apps: Apps like PayPal, Venmo, and Cash App allow users to buy crypto.
- Peer to Peer P2P services: The challenge with some of the crypto trading options is that users may not be able to move their crypto assets off platform. Users concerned with privacy and anonymity can consider using P2P services that allow them to trade crypto directly.
Crypto Wallet
A crypto wallet is a piece of software or hardware that allows users to interact with different blockchains, and thus buy, sell, and store various types of crypto.
There are two main parts to a crypto wallet: a private key and a public key. The private key is like the key to a safe deposit box. Anyone with access to the private key can take control of all the crypto assets held in a given wallet. Users should not share their private key with anyone under any circumstances.
The public key is derived from the private key and allows users to receive funds. This key is safe to share. When someone wants to receive crypto, they use their wallet to generate a public key and share it with the person who will be sending them coins.
A single wallet can generate many public keys, also known as addresses. A wallet address can come in the form of a QR code or a long string of randomly generated alphanumeric characters.
Technically, a crypto wallet does not contain actual coins. It provides a way to engage with a blockchain network and prove that users have ownership of specific digital assets. Using the private key, a wallet holder can initiate or “sign” a transaction, proving that the coins are theirs to send.
While wallets are generally used for storing, receiving, and sending crypto, some have additional functionality as well. Wallets can also provide the ability to swap different tokens, buy and sell crypto, or interact with different decentralized applications (dApps).
There are various types of crypto wallets, these include:
- Software wallets: A software wallet is a computer program that has no physical counterpart. There are different types of software wallets, depending on where the program runs. Wallets like these can exist in a web browser, mobile device, or desktop computer. Software wallets are hot wallets by default because they exist on an internet-connected device.
- Web wallets: Web-based wallets work in a web browser and allow for easy integration into apps like Non Fungible Token NFT marketplaces or decentralized finance (DeFi) markets. These wallets are among the least secure and are not suitable for long-term crypto storage.
- Mobile Wallets: Mobile wallets exist on a mobile device like a smartphone or tablet. These wallets can be convenient for sending or receiving small amounts of crypto. If someone wants to buy Bitcoin at a Bitcoin Automatic Teller Machine ATM or use Bitcoin to pay for something, a mobile wallet might be a good option.
- Desktop Wallets: Desktop wallets run on a desktop or laptop computer. They can be useful for those who want to use crypto without having to go through an exchange. While desktop wallets allow users to hold their own private keys, they are still considered to be less than secure because those keys are held on an internet-connected device.
- Hardware Wallets: Hardware wallets are small devices that hold a user’s private keys and allow for the sending and receiving of transactions. These wallets usually interact with a user’s computer via apps or web-based interfaces.
Crypto Wallets vs crypto Exchanges
A wallet and an exchange are two different things. Yet they still have some characteristics in common.
Crypto wallets and crypto exchanges are similar in that they both:
- Allow for the storage, receiving, and sending of crypto
- Provide an easy way for people to interact with the crypto ecosystem
- Are designed to be as simple as possible
Despite performing some of the same functions, wallets and exchanges differ in some important aspects. Crypto wallets and crypto exchanges are different in the following ways:
- Wallets allow people to hold their own private keys, exchanges do not
- You cannot buy crypto with a wallet alone, although some have connected exchanges
- Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously.
Table 6. Comparison between crypto wallet and crypto exchanges
|
Crypto wallets vs exchanges |
|
|
Similarities |
Differences |
|
Allow for the storage, receiving, and sending of crypto |
Wallets allow people to hold their own private keys, exchanges do not |
|
Provide an easy way for people to interact with the crypto ecosystem |
You can’t buy crypto with a wallet alone, although some have connected exchanges |
|
Are designed to be as simple as possible |
Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously |
Source: SoFiLearn sofi.com
ROAD AHEAD for arab banks and authorities
Crypto exchanges are important gateways for investors to invest in crypto currencies. So far there is still a relatively small amount of world resources and data to analyse and monitor crypto exchanges worldwide and help investors in choosing the best crypto exchange. Hence Arab central banks and authorities should join hand to establish regional centres for crypto exchange market intelligence.
The crypto exchange market intelligence centres will carry the following tasks:
- Data gathering: This involves gathering real time data to capture and trace the activities of crypto currency exchanges worldwide. Data gathered may include basic trading activity indicators to advanced data monitoring data.
- Ranking crypto exchanges: This involves the development of various methodologies to rank crypto exchange based on market intelligence and analytics conducted on gathered data.
- Educating the investor: This involves the gathering of resources to educate investors on using crypto exchanges and how to pick the best crypto exchange that fulfil the investor needs.
- Regulating crypto exchange market: This involves setting rules at national and global level to regulate the crypto exchange market and protect the investor from fraud and avoid misuse for terrorism and war finance.
- Developing standards: There currently no standards recognized worldwide to rank crypto exchanges according to various criteria and key variables. Hence the proposed regional centres for crypto exchange market intelligence should develop global standards for ranking and evaluation of crypto exchanges worldwide.
