Crypto Exchanges — Which Is The Right Choice For Me ????
In previous posts we had discussed the revolutionary new technology called Block Chain and its probably first usage in BitCoin which was the first crypto ever. During our previous discussions on how money is created and how it is regulated in modern banking system (for greater details please read previous posts, all titled ‘Money’), we had learnt that modern currencies, since abolition of gold backing in 1930s, are free floating entity called FIAT currencies and it derives its value because people believe in the promise made by central banks. Almost same principles apply to BitCoin and other alt coins where people see them as means of storing wealth and a free trading medium which cannot be diluted by reckless printing of currency notes by governments and central banks. Crushing fall of financial systems in 2008 is generally considered as precursor which motivated many people to shift their faith away from government controlled Fiat currencies and cryptos riding on block chain provided them with an ideal alternative. For many of us the biggest issue was ….is it moral, ethical and legal to invest in cryptos??? ….and for that we have supreme court to thank……which in its 2018 decision gave it the status of other asset class such as gold, silver, crude or commodity. In simple words it is still not a legal tender of payment for goods and services such as its acceptance by government of Al Salvador, but it can be used for investment and trading. Thereafter, in the previous post we looked at different types of cryptos from Storage Coin to Utility and Security Tokens and how to choose among them to ensure that our investment remains safe. Now all that remains is the practical part……how to commence our journey on a Digital Road to Cryptos. Therefore, for all those who have still not decided which crypto exchange to choose but also for those who are invested but still not sure……we intend to discuss crypto exchanges in this post.
But the first question first….why do we need an crypto exchange???? In essence, this actually contradicts the very principle of decentralised money by handing over the rights to transact to a central agency. But imagine, if you want to buy or sell a crypto, how will you find the prospective trading partner? Technically, it is possibly to create your own identity in a block chain and start trading but you will require separate IDs for separate cryptos. How many of us can be sure, to remember all the different IDs and their passwords (private keys) ??? That is why, for ease of trading and storing different cryptos we need an exchange. They charge us a little fees for trading as well as for storing but makes the process user friendly and easy to handle even for a person with no specific background in computers.
Having understood the purpose and before going into the technicalities let us listen to our heart and mind to list some basic qualities which we would like to see in our selected exchange:-
- Of course the first thing which comes to mind is, does it has legal clearances? Don’t be alarmed but, during settling time of digital currencies many exchanges had to shut shop because they did not have requisite clearances from their local governments. Therefore, it may be a good idea to check legal status of prospective exchange by doing a simple google search, prior committing our money.
- Obviously the next question, which we should ask ourselves is, is it safe? This is a tricky question, as everything is safe till it is broken. Nothing is farther from the truth than the general perception that crypto exchanges are being run and managed by the top notch experts in this field and therefore these cannot be hacked. Once again google will provide you all the answers, if you have a heart to accept it. For a quick search, please do consider reading about MtGox (2014), BitGrail (2018), Coincheck (2018), KuCoin (2020) and Poly Networks (2021). Once again, the aim is not to scare you but to emphasise the importance of choosing a secure and stable exchange for a long lasting investment experience.
- The next differentiation comes between Decentralised and Centralised (Spot) Exchanges. For less technically inclined, it would suffice to say that decentralised exchanges facilitate peer to peer transactions without any central authority and mostly appeal to people who do not wish to disclose their complete personal financial details. It also appeals to those hardcore cult followers who strongly believe that there should be no intermediary control over any transaction reflecting the true spirit of BitCoin or many such other cryptos. Few known decentralised exchanges are dYdX, Uniswap (v3), PancakeSwap (v2). But to most of us common investors, who are more inclined to choose safety and comfort over ideology, centralised exchanges which are also known as spot exchanges are more appealing. Chances are that if you know about a crypto exchange for any good reason it is a spot exchange. All of us who follow financial news might know about a new unicorn CoinSwitchKuber which is a spot exchange. In addition few more popular exchanges in India are WazirX, CoinDCX, UnoCoin and ZebPay. If you want to trade in derivatives there are specialised exchanges for that too but many Spot Exchanges offer this as part of their integrated service.
- Charges and Fees — Whenever you start trading, you will need a crypto wallet. This is a digital wallet similar to Demat account which holds the cryptos which you have bought. Almost all the exchanges provide this facility for a fee. In addition, exchanges will charge you for every transaction be it buying or selling depending upon the type of account. If you are an investor who wants to accumulate cryptos, you may like to choose an exchange which offers greater safety even if it means paying more fees. On the other hand, if you are a trader you may prefer an exchange with least charges while providing reasonable safety.
- Lastly, I would consider safety in numbers. This is a new field which is evolving everyday in technology as well as in business model. Therefore, if you have the technical acumen to spot the next winning horse go ahead and invest in it but if you have limited knowledge like me about this field but still feel attracted to it, it would be best to follow the trend. The safest bet would be to choose the exchange which has the largest market share in number of accounts, transactions and supports local currency as well. If you are wondering, where will you find all these data……its a one stop solution at CoinMarketCap.com.
I know…..I know….for many uninitiated, it is too theoretical but still I would advise all, to do some research even if you end up taking an easier option of copying your friend or relative. For such people please start your search from WazirX an India based exchange acquired by Binance Holdings, the largest global exchange by volume. Few more India based shortlisted options can be CoinDCX, an early bird in this field in India or CoinSwitchKuber which has been in the news for all the right reasons.
Ok guys, time to wrap this post. In the next post we will see which all documents are required for KYC (Know Your Customer) before opening an account with crypto exchanges and the process involved in it. Please do not forget to like and share the post with all your friends and loved once. For people who might have joined recently, please do not forget to hit the FOLLOW button before you leave. See you next week with more discussions on this topic.