Selecting a crypto trading platform is a particularly pernickety process, and has become even more important in the past couple of years given the issues that major operators in this market have encountered.
Rather than rushing to adopt the first service you encounter, or taking the recommendation of just one friend or colleague, you’ll be better off if you research prospective platforms yourself.
So to that end, here’s an overview of what you need to be aware of as you get your magnifying glass out and hold it up to the ever-enticing crypto trading scene.
Starting with Security
Any third party platform you use needs to have a handle on security, as you don’t want your data or your digital assets to end up in the wrong hands.
Here’s what you need to see in this context:
Verification Process
A robust KYC (Know Your Customer) policy is required both for regulatory compliance and as a safeguard against identity theft and fraud. This is significant as the economic fallout of financial crimes is counted in the trillions of dollars, so you want any platform you pick to have an active part in preventing it.
Cold Storage
Platforms boasting a significant percentage of funds in cold storage signal commitment to protecting assets from cyber threats. In a crypto context, cold storage is basically any medium for keeping critical keys that aren’t network accessible – and thus is immune to the types of cyber attacks that have become prevalent, resulting in $1.7 billion being stolen last year alone.
Two-Factor Authentication (2FA)
This additional layer of security can dissuade even the most persistent digital marauders – and so whether it takes the form of biometric login options or SMS-delivered security codes, it really should be on your checklist. Ideally you’ll be looking for full multifactor authentication, encompassing even more layers of verification before each login attempt is given the green light.
Insurance Fund
Some platforms offer an insurance fund that acts as a safety net in extreme cases like exchange hacks. This is more about providing peace of mind to users like you – and will be worth having no matter the scale of your intended investment and trading activities.
Regular Security Audits
Continuous vulnerability assessments, conducted by reputable third-party services, attest to the platform’s dedication to cybersecurity strategies. Such stringent adherence to best practices here should really be looked for across all online services you use – and in the case that money is on the line, it’s a no-brainer.
Moving Onto Different Categories of Crypto Trading Platforms
Crypto trading platforms are not a monolith; they vary widely, catering to different needs and trading styles. Understanding these variations is critical for matching your strategy with the right platform, so here’s a look at the main types on the table:
Centralized Exchanges (CEX)
These are the goliaths of crypto trading, offering a wide array of tools and services. They excel in user experience but can be more susceptible to regulatory scrutiny.
Decentralized Exchanges (DEX)
Championing anonymity and autonomy, DEXs allow peer-to-peer trades without an intermediary. However, they may lack liquidity compared to their centralized counterparts.
Hybrid Exchanges
Combining the best of both worlds, hybrid exchanges aim to offer CEX’s liquidity and user interface with DEX’s security benefits.
Over-The-Counter (OTC) Platforms
OTC platforms specialize in handling large-volume trades that might otherwise move the market on standard exchanges. They ensure minimal slippage – meaning that pesky price movement between order placement and execution.
Finding the best crypto otc trading platform is therefore best for big players and institutions. Another crucial point for traders dealing in sizable amounts is that OTC platforms offer discreet trade execution away from the public eye. This is where they shine, ensuring that massive transactions don’t tilt supply-demand dynamics unfavorably against you.
We’ve already seen the rapid growth of the OTC derivatives market, with the ISDA pegging it at $19.8 trillion in mid-2023, representing an 8.1% uptick. In terms of daily trading volumes for crypto specifically, these sit at around $1.5 billion – although can be significantly higher.
Whatever your ultimate choice is here, the main thing is that you have a foundational understanding of the distinctions that separate competing platforms from one another, and use this to decide on the right route forward.
Looking Into Liquidity
While crypto may have risen to prominence as a result of a desire to get away from the old ways of doing things, moving forward into a future where digital assets reign supreme, there’s still the matter of liquidity to contend with.
It’s a marker for how quickly and efficiently you can execute trades without affecting the asset’s price.
Keep an eye out for:
Currency Pairs
A platform with a multitude of trading pairs increases your chances to trade effectively across different currencies.
Market Depth
Look for a deep order book. It’s indicative of a robust, active marketplace where large volumes are regularly traded.
Slippage
Lower slippage is synonymous with high liquidity – it means your trades are less likely to suffer from major price changes during execution, as we touched on earlier.
Trading Volume
High daily trading volume is both reassuring and empowering, as it is typically tied to better prices and quicker transactions.
Liquidity is significant not just because of how it impacts the moment to moment operations of a trading platform, but also as a result of its role in informing investor confidence. The volatility of the crypto market as a whole can partly be put down to liquidity hiccups at key moments – so making sure your choice of platform doesn’t have this issue is savvy.
It’s the kind of due diligence that applies to investments of all types – whether you’re one of the 35% of people who see real estate as the best long term bet for reliable returns, or more energized by the idea of newer asset classes like crypto.
Factoring in Fees
Every trade comes with costs to bear, and yet not all fee structures are the same. So for instance while the amounts might seem small on a per-trade basis, they can add up to significant sums. As such, you need to be abreast of the following add-in expenses when weighing up crypto trading platforms:
Trading Fees
These are incurred on each trade and are often expressed as a percentage of the trade volume. So for instance you can typically expect these fees to sit at up to a maximum of 1.5%, although this can dip as low as 0% depending on your relationship with the platform, the size of the trade and even the assets involved.
Withdrawal/Deposit Fees
Transferring assets in or out of platforms may attract fees, which vary widely among exchanges. There are also transaction fees to take onboard here – so for Bitcoin these currently sit at an average of $3.68, but have risen to over $25 in the past.
Tiered Fee Structures
Many platforms offer reduced trading fees based on monthly trading volume or holdings in the platform’s native cryptocurrency – so you basically get rewarded for your loyalty as well as your willingness to commit significant sums to a specific service, which could come at the cost of flexibility.
Hidden Costs
Be vigilant about other potential expenses, such as spread costs or inactivity fees that can stealthily erode your returns – which is why crypto is more suited to active investors rather than those looking for savings opportunities. Again, this needs to be taken on a case-by-case basis, so be sure to read the small print on any platform’s Ts & Cs before you sign up and start trading.
Wrapping Up
The final thing to remember when choosing a crypto trading platform to use is that as well as all of these considerations, you need to look into the reputation of each competing solution, and gather independent input from several reputable sources to move forward with confidence.
In a niche that’s marred by scandals and uncertainty, a supernatural level of vigilance is recommended above all else.
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