With the cryptocurrencies market exploding over the course of 2017, more and more people are interested in hedging their bets by acquiring some as a speculative investment. Bitcoin has been the headline grabber but whether it will remain the dominant cryptocurrency in the longer term is still very much open to debate. Other cryptocurrencies are also certainly worth researching and can be broken down into two main categories:
i) Direct fiat currency alternatives: these include Bitcoin, Litecoin and Dash and these cryptocurrencies are intended to be used for value exchange, the buying and selling of goods & services, in the same way as we use fiat currencies.
ii) Blockchain platform tokens: these include Ether, Ripple, NEO and the new KODAKCoin. These cryptocurrencies can only be ‘spent’ on a particular blockchain platform, such as the Ether and NEO smart contract and decentralised applications platforms. However, they still have a fiat currency conversion rate and can therefore be traded.
Our mandate here is not to discuss the merits of any cryptocurrency investment or particular cryptocurrencies. Rather, we’ll provide an overview comparative analysis of the major international cryptocurrency exchanges on which they can be bought and sold, for those who have come to the conclusion that they would like to do so, or are simply generally interested in the market. Consumers in Pakistan can review this analysis and make their well-informed decisions related to the cryptocurrency investments.
Different Kinds of Cryptocurrency Exchange
Like a stock, commodities, derivatives or forex exchange, cryptocurrency exchanges facilitate the buying and selling of a financial asset or instrument – in this case cryptocurrencies. There are 2 main kinds of cryptocurrency exchange:
A- Traditional Exchanges
The traditional exchanges work like a stock exchange or commodities exchange. Cryptocurrencies have current exchange rate, with USD usually the base currency quoted, and rates in other fiat currencies supported derived from that. Prices are derived from current supply and demand on the exchange for a particular cryptocurrency and buy or sell orders are executed in the exchange’s market with a service fee taken for each transaction.
Because cryptocurrency markets are still developing and futures markets new and only for Bitcoin, there is not yet a universal mechanism for setting the exchange price of cryptocurrencies at a given moment. Exchange rates depend upon supply and demand on the particular exchange at a given moment in time. As a result, quoted buy and sell prices for a cryptocurrency often vary between exchanges. This can be regularly up to 10% but sometimes even more at particular moments. As such, it is important for buyers and sellers to use one of the larger exchanges as the higher liquidity levels and market depth mean prices are more likely to be closest to the average between different exchanges.
B- P2P Exchanges
This kind of exchange simply connects buyers or sellers, almost like eBay. While it should logically be at or close to the current average exchange rate for a cryptocurrency if agreement is be reached, buyers and sellers in theory have complete control of the prices and must agree between themselves. All the P2P exchange does is connect counterparties. P2P exchanges are normally built on blockchain technology so involve no management or central authority. Transactions are usually free of a fee and the exchange is either not intended to generate revenue or does so through advertising. Anonymity and a decentralised process with no digital assets or information being exchanged or retained is an advantage to P2P exchanges however lower liquidity, not fixed prices and the risk of chargeback fraud (buyers reversing credit card of digital wallet payments after the transaction has completed) are risks.
Top Global Exchanges
Cryptocurrency markets are fast paced and new exchanges are likely to appear in future months and years, as well as those currently on the market making changes to their services. As such, always do so some additional research on current conditions and reputation. This is by no means an exhaustive list but the exchanges detailed below are currently five of the most popular cryptocurrency exchanges internationally.
Established by Brian Armstrong and Fred Ehrsam in 2011 and backed by some serious investors, Coinbase is one of the most popular cryptocurrency exchanges worldwide. The platform is accessibly designed and security is considered to be among robust. Trading in Bitcoin, Bitcoin Cash, Litecoin, Ethereum and Ethereum Classic is supported. The base fiat currency is USD and users with funds denominated in other currencies must convert them into USD to fund a Coinbase account.
The company also runs the GDAX exchange which is for professional cryotocurrency investors and operates in the US, Canada, UK, Europe, Australia and Singapore. Coinbase is based in San Francisco.
Another San Francisco-based exchange, Kraken was founded in 2011 and is one of the more favoured exchanges for more experienced cryptocurrency traders. Kraken more resembles a professional financial exchange and as such can prove a little intimidating for beginners. However, this also means that a more sophisticated level of service is provided with margin trading, stop losses and being able to set automated buy and sell prices all possible. Kraken also supports a good range of fiat base currencies including US and Canadian dollars, pound sterling, euro and the Japanese Yen. A good range of different cryptocurrencies are also supported including Bitcoin, Ethereum, Ripple, Dogecoin, Litecoin, Zcash, Monero and several others.
The exchange is considered one of the most secure but one thing to be aware of is that Kraken account holders are asked to provide a higher level of personal information than on most other exchanges. Users from most international territories can open a Kraken account.
The Seattle-based exchange was established in 2014 and has one of the highest trading turnovers among all cryptocurrency exchanges. Bittrex supports trading in all major cryptocurrencies and probably offers the widest range of the major exchanges. Bittrex’s security history is strong, with no reported hacks up until this point. Fees are a transparent 0.25% of any transaction though one drawback is that all pairs offered are cryptocurrency based and fiat/crypto trading is not supported.
Headquartered in Hong Kong and founded in 2012, BitFinex is the self-proclaimed largest and ‘most advanced’ cryptocurrencies exchange in the world. A good range of the biggest cryptocurrencies can be traded on Bitfinex, and the platform also supports several fiat base currencies. A wide range of trading tools such as margin funding and leverage trading are also available on BitFinex. While security is high, and has been improved since, the exchange has had some security breaches in the past and has been affected by hackers.
New York-based Gemini is a good exchange for those only interested in trading either Bitcoin or Ethereum. The exchange only supports those two cryptocurrencies, plus the USD, but offers high levels of compliance and extremely tight security. Fees are very competitive.
London-based CEX is another of the larger exchanges and perhaps the best when it comes to catering equally well to novice and more advanced cryptocurrency traders. A good range of fiat and cryptocurrencies can be traded and standard buy or sell orders are extremely easy to execute. At the same time sophisticated tools and margin trading are offered for users with more advanced needs. CEX has had one minor security issue in the past but is generally considered a very robust exchange from a security point of view.
The top p2p cryptocurrencies exchange, LocalBitcoins matches buyers and sellers directly. Available all over the world and with low personal identification verification requirements LocalBitcoins facilitates transactions in almost any crypto or fiat currency, provided a counter-party can be found on the exchange.
When deciding upon a cryptocurrency exchange, there are several important factors to consider and different exchanges will better suit the needs, preferences and priorities of different buyers and sellers.
Crypto/Fiat Currencies Supported: not all exchanges support all cryptocurrencies, or all fiat currencies. As such, an important quality to assess is if an exchange allows you to buy and sell or at least most of the cryptocurrencies you believe you might be interested in transacting as well as supporting your preferred base currency, or at least one you are comfortable with.
Reputation/Security: does the exchange have a high level of security in place to protect itself from potential hacks or data breaches? Does its history suggest the technology it is built on is stable and offers high level performance minus crashes or outages? And do those behind it have a solid background and reputation? These are all important questions to ask and research before choosing an exchange.
Fees: are they competitive when considering the level of service offered by the exchange? Fees can vary relatively significantly between exchanges and can be applied to deposits, transactions, wallet hosting and account maintenance as well as only on transactions, so this is an important factor to explore.
Payment Methods: not all exchanges support all popular payment methods for making account deposits and withdrawals. Debit and credit cards, bank transfer, Paypal and other digital wallet services may be preferable for different users so make sure your chosen exchange supports your favoured payment method, or at least one you are willing to use.
Verification Requirements: most traditional exchanges will ask for a copy of personal ID or other proof of identity before an account can be set up and transactions completed. This is to protect both the exchange and users from malicious actions and money laundering. Different exchanges have different levels of personal information requirements that they oblige account holders to provide. Some can be as strict as banks or stock brokers while others allow relative anonymity. For different reasons different users may prefer exchanges with higher or lower verification requirements for accounts.
Liquidity/Exchange Rates: as mentioned in the introduction, at present there is not complete uniformity on the exchange rates quoted on different cryptocurrency exchanges due to the lack of one accepted methodology. Prices depend upon supply and demand on the exchange at a given time so exchanges with more users and deeper liquidity tend to have exchange rates that are more consistently in line with averages.
Geographical Restrictions: not every cryptocurrency exchange accepts account holders from every geographical location. Restricting account holders based on geography can be based on numerous considerations, from regulations imposed by the government of wherever the exchange is based and registered to company policy for different reasons. So make sure you check an exchange being considered accepts account holders from your geography.
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