Trading cryptocurrency is complicated. You can make your life a lot easier by using a crypto exchange. But with so many options—including many that have been around just a few years—choosing the right one takes care.
When cryptocurrencies first appeared, early adopters acquired coins through mining or by swapping them in online forums. But unless you have lots of time (and technical expertise), chances are you’ll want something more convenient.
Enter crypto exchanges: businesses that store crypto assets and match you with other buyers and sellers, making it possible to trade crypto much like you would trade stocks in a brokerage account. (Most big-name stock trading companies like Merrill Lynch and Schwab still don’t accomodate crypto trades.)
But while exchanges have made trading crypto much more accessible, there have been some big problems too, from headline-making security breaches to trading fees that dwarf what investors might pay to trade other assets.
The upshot is that you can’t just go with whatever exchange you happen to stumble across surfing the web. Here are seven key factors to consider before choosing a cryptocurrency exchange:
1. Check the number of coins you can trade
With crypto’s surging popularity, there are now as many as 10,000 different coins to choose from. No exchange offers every digital asset, so make sure yours provides the ones you want. Think about whether you are mostly interested in bitcoin, ether and the handful of leading DeFi tokens that help drive smart contracts or want a simpler or more complicated menu.
A great starting place are large, well-known exchanges like Coinbase and Kraken, which offer a wide array of coins and tokens that can accommodate most investors, from beginners to active traders. Coinbase lets you trade more than 450 coins and Kraken offers more than 160 coins including so-called meme coins like dogecoin and Shiba Inu coin.
For the crypto obsessive, there are exchanges, often based overseas, thatlet you trade dozens of obscure coins. One note of caution: These don’t always followU.S. laws or offer the same level of investor regulations that you might expect from, say, a U.S. stock trading platform.
If you want to mostly trade stocks along with a few prominent coins such as bitcoin cash, ether and dogecoin, consider Robinhood, the well-known stock-trading app, which lets you trade a handful of coins commission-free.
2. Make sure there’s sufficient liquidity
It’s important to find an exchange with liquidity—the ability to easily turn your cash into coins, or vice versa—without paying a big markup.That’s especially true because prices move fast in the world of digital assets. When the price of a coin you want to buy is rocketing to the moon, you’ll want to know your buy order is filled quickly and at a price close to the one you see quoted on your screen. (Ditto if you are trying to sell as one plunges back to earth.)
The quickest way to get a handle on this is to look at an exchange’s trading volume: the higher, the better. Resources such as crypto information websiteCoinMarketCap provide the 24-hour trading volume for hundreds of exchanges. Coinbase and Kraken recently have shown the highest trading volume.
In addition, you’ll want to look for an exchange that’s well-established, with at least a five-year track record, and one that also takes steps to prove it truly possesses the assets it claims to hold on your behalf, according to Alexander Enser, founder of crypto education company MyCryptoAdvisor. Kraken, he points out, has a “verify my audit” button that lets users see when an independent audit last verified the coins in their accounts.
3. Compare the fees
Unlike your brokerage accounts at Schwab or Fidelity where you can now trade stocks, bonds and ETFs for free, there’s no free lunch with crypto exchanges. In fact, crypto exchanges typically charge a fee every time you deposit, trade or make a withdrawal. Fees range from 0% to 5% per trade, depending on your payment method and the type of transaction. Fee tiers are typically based on your total trading volume over a 30-day trading period, and the percentage you pay generally falls as the size of your trades increases. For example, if you traded $1,000 worth of tokens 15 times in a month on Bitstamp, fees would amount to $75. But if you made a single trade of $20,000, the fee would be only $50.
Fees at some major U.S. exchanges:
- Coinbase—0.5% to 4.5%; varies by type of transaction
- Kraken—0.9% to 2 %; varies by type of transaction
- Crypto.com—0% to 2.99%; varies by type of transaction
- Binance.US—0.1% to 5%; depending on payment method
- Bitstamp—0% to 0.5%
4. Ensure there’s enough security
It’s no secret crypto exchanges are vulnerable to hacks: Mt. Gox, one of the most prominent early exchanges, collapsed after $460 million in customer assets were stolen in 2014. As recently as last December, exchange BitMart was hit for $150 million. (BitMart has said it will reimburse investors.) So it’s common sense to avoid putting money into a crypto exchange with a significant history of cyberattacks or theft.
Most crypto exchanges offer basic protections like two-factor authentication, typically using apps like Google Authenticator or Authy to build a line of defense against phishing scams or other crypto theft. But you can also be on the lookout for additional measures. For example, Crypto.com’s Exchange mobile app supports biometric login, which uses facial and fingerprint identification on your smartphone to verify your identity.
To further augment security and ward off imposters, major exchanges such as Kraken and Gemini require you to provideU.S. government-issued identification such as a passport or driver’s license when you open a new account. They also have additional layers of codes that need to be authenticated when you buy or sell, when you change funding levels, or if you make major account changes, like freezing your account, that require a master password.
5. Consider the controls
Stock exchanges like the New York Stock Exchange are heavily regulated. By comparison, crypto exchanges are the Wild West. One reason is that while the NYSE has been around for hundreds of years, crypto is barely more than a decade old. Another is that Washington is still arguing about the right way to oversee the crypto universe, with agencies like the Securities and Exchange Commission and Commodities Futures Trading Commission still vying for primacy.
Until the dust settles in Washington, it’s best to look for an exchange that already has security controls and financial audits in place. At the very least, any exchange you work with should be able to show it has audited Service Organization Control reports. SOC 1 confirms that the exchange’s financial operations and reporting controls are well designed and functional, while SOC 2 certifies that the technology systems driving an exchange’s security, processing integrity, network availability and confidentiality controls are in proper working order.
Unfortunately, these reports aren’t always easy to find on exchanges’ websites. Exchanges may send out press releases when they complete SOC 1 and 2 examinations, as Coinbase did with auditor Grant Thornton in 2020 and Gemini did with Deloitte in 2021. But if you can’t find evidence of these reports online, it’s worth calling the customer service department.
Some U.S. states have been proactive on the regulatory front, hoping to protect consumers. For example, exchanges such as Gemini, Coinbase and Bitstamp have a Bitlicense issued by the New York State Department of Financial Services, which verifies that stringent business controls are in place.
6. Vet the insurance policy
Digital security that will prevent hackers from stealing customer assets should always be priority No. 1 for a crypto exchange. But the good ones will still have a healthy insurance policy just in case.
Many exchanges now carry commercial crime insurance which typically covers acts of dishonesty, theft, robbery, destruction or cyberfraud. For example, Gemini says it maintains $290 million in digital-asset insurance for specific losses. Still, insurance varies widely across exchanges, so it’s important to check what they cover. You can do so in the user agreement you are given when you sign up, and also frequently in the FAQ sections on exchange websites.
Another important ask: Make sure any exchange offers Federal Deposit Insurance Corp. protection for your cash. Chances are your crypto trading account won’t just hold coins. You’ll also have to keep some deposits in U.S. dollars, as you move money into and out of crypto markets. Exchanges should keep this money in a custodial account at an FDIC-insured bank, which will protect you on deposits of up to $250,000 in the unlikely event of a bank failure. Most major exchanges offer this level of protection, but not all do.
7. Get a handle on the tax reporting
If you make money trading crypto, the IRS wants to know about it. In fact, cryptocurrency trading profits are taxed just like profits you might earn trading stocks and bonds. Unfortunately, reporting this information to the IRS is a lot more complicated.
Come tax time, you should look out for K-1, 1099-MISC or IRS Form 8949 Schedule D statements from digital-asset providers. These detail your profits and losses for the year and are equivalent to the Form 1099s sent by a stockbroker. The problem is some crypto exchanges (especially ones based in foreign jurisdictions) do not send these forms. And when forms do arrive, they may only appear after the April tax deadline. (In that case, be prepared to file for an extension.)
If tax reporting is important to you when shopping for a new exchange, search “crypto taxes” on its website or contact customer service to ask when and if tax forms will be sent to you. For example, if you earned more than $600 in crypto income during the year, Gemini will issue you a Form 1099-MISC. You can also download your Form 1099-MISC (or confirm you did not receive one) in the “Statements and History” section on the “Account” page on the Gemini website or mobile app.
“You need to know how and when tax information will be sent to you,” says Joseph Piszczor, a financial planner in Canonsburg, Pa. “You cannot just ask your CPA to track it down.”
Meet the contributor
David Conti
David Conti is a contributor to Buy Side from WSJ.
