NextAdvisor
We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
Kraken, CoinEgg, Gemini, Binance — we’re not talking about mythical creatures or the Internet’s latest buzzword. These are all cryptocurrency exchanges — digital marketplaces where you can buy and trade crypto.
You can’t just buy crypto from your bank or investing firm. Once you’ve decided you want to buy some Bitcoin, Ethereum, or another cryptocurrency, you’ll need to create an account on a crypto trading platform to exchange your U.S. dollars (or other currency) for digital assets.
Some, like Coinbase, have been around since the early days of Bitcoin, when there was far less oversight into how crypto was bought, sold, and traded. Others, like Robinhood and PayPal, are better-known for other services, and have only recently allowed customers to trade crypto within their existing accounts.
Here’s what you need to know about why choosing the right crypto exchange is important, and the details experts recommend evaluating before making your choice.
What is a Crypto Exchange?
A crypto exchange is a platform on which you can buy and sell cryptocurrency. You can use exchanges to trade one crypto for another — converting Bitcoin to Litecoin, for example — or to buy crypto using regular currency, like the U.S. Dollar. Exchanges reflect current market prices of the cryptocurrencies they offer. You can also convert cryptocurrencies back into the U.S. Dollar or another currency on an exchange, to leave as cash within your account (if you want to trade back into crypto later) or withdraw to your regular bank account.
There’s no one crypto exchange that’s best for every user, says Tyrone Ross, a financial advisor and CEO of Onramp Invest, a crypto investment platform for financial advisors. Instead, he says it helps to evaluate your own interests when it comes to crypto, and find an exchange that aligns with your goals. For example, maybe you’re looking for a specific coin, or you want to continue learning more as you get into crypto investing.
“Am I looking for something like Casa, because Casa does a lot of work for me and I don’t have to worry about a public and private key? Am I going to Gemini, because Gemini has this weird coin that I want and they’ll allow me to buy it? Or am I going to Coinbase because Coinbase has these really cool tools that allow me to learn and earn crypto?”
What to Look for in an Exchange
Accessibility
Your location may prevent you 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 at all.
In the United States, there’s a lot of regulatory uncertainty around cryptocurrency, and some states have instituted their own regulations. For example, New York requires exchanges to obtain a BitLicense before they can operate within the state and only allows licensed companies to offer certain approved coins. Most other states don’t have regulations as strict as New York, but many do regulate in some way, or are taking steps to do so. Thirty-one total states have pending legislation regarding digital currencies in their 2021 legislative sessions, according to the National Conference of State Legislators.
You can often find information about the geographic limitations of an exchange — as well as related accessibility factors, like national currencies accepted — on its website or within the terms of service.
Security
Cryptocurrency isn’t backed by any central institution, and your cryptocurrency holdings aren’t protected the same way as money in the bank or traditional investments. Some exchanges, like Coinbase and Gemini, keep any balances in U.S. Dollars you hold with them in FDIC-insured bank accounts. But FDIC insurance doesn’t apply to cryptocurrency balances.
To protect your crypto, 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. That means if Coinbase’s reserves were hacked and any amount of crypto up to $255 million was taken, account holders would be protected. Others, like Kraken, rely on their security practices to protect clients rather than insurance policies.
Whether you plan to keep your crypto holdings within an exchange or only have it there for a short time before moving it into your own wallet, the exchange’s security should be top priority. For example, look into how much of its assets the exchange keeps offline, in hard storage.
This is even more important as the value of cryptocurrencies grows, since more value means more lucrative targets for potential thieves. In 2020, there were 28 total attacks on crypto exchanges, the largest of which resulted in more than $200 million in cryptocurrency assets stolen from Singapore-based crypto exchange KuCoin.
Look into how much of its assets the exchange keeps offline. While exchanges, by nature, need to keep some crypto active to facilitate trades, it’s smart to keep the majority of holdings in cold storage, or offline, where it’s more difficult for hackers to access. Coinbase, for example, says it stores 98% of customer funds offline, while only 2% is actively traded. That storage, combined with its $255 million insurance policy, offers more reason to trust your crypto assets will be covered in the case of a hack.
You can also look for general online security measures you may already be familiar with on other platforms, such as two-factor authentication. That means, in addition to your username and password, you’ll have to verify your identity using an additional method, like entering a code you receive by text message, each time you log in.
In general, you may feel most secure sticking with more popular exchanges with an already-large customer base. You may be taking more of a risk doing business with smaller or newer exchanges that don’t have their security measures and offerings spelled out clearly online.
“Size matters here,” says Douglas Boneparth, a financial advisor and president of Bone Fide Wealth in New York. He points to Coinbase, which recently went public on the Nasdaq stock exchange. “There are pros and cons to that, but you now have public financials, you can actually see the health of the company, and that’s important when thinking about using an exchange or investing with any company or product or service that they’re providing.”
Fees
Fees are another thing to consider, but don’t necessarily let a high fee structure turn you off an exchange. “The easier they make it for you to buy it, the higher the fee that you’re going to be paying,” says Spencer Montgomery, founder of Uinta Crypto Consulting, a program for new investors to learn about crypto. Higher fees can also be a worthwhile tradeoff for the added protections and insurance that the bigger, more popular exchanges provide.
Exchange fees may be a fixed price, but are often a percentage of your trade. Some exchanges, like Cash App, charge fluctuating fees based on price volatility. Fees are often charged per transaction, and can differ whether you’re the seller or the buyer. There may also be different fees depending on which currencies you trade. Make sure you understand exactly how and when an exchange plans to charge you for your crypto transactions before handing over your cash.
Liquidity
If you plan to buy, sell, or trade your crypto, the exchange you choose should have enough trade volume to ensure your holdings are relatively liquid, meaning you can sell them when you want. Again, this can be an instance where size matters. Often, the more popular exchanges are also those with the largest trade volumes.
When a lot of trades are happening within an exchange at any given time, it means you have a higher chance of buying or selling the crypto you hold at the best price, Montgomery says. Crypto prices move very quickly, so when you use an exchange that doesn’t have a lot of trade volume, you could end up paying a higher price than you would on more popular exchanges. For example, say you decide to buy Bitcoin once its price falls below $32,000. If you’re on an exchange with a low trade volume, you may end up actually paying a different price than you think, if your purchase doesn’t actually go through until the price has moved back up.
CoinMarketCap, a price-tracking site for cryptocurrencies, continually tracks the trade volume of hundreds of exchanges in operation. Currently, it lists Binance, Coinbase, and Huobi as the top exchanges by volume worldwide.
Coins offered
Not every exchange offers each of the thousands of cryptocurrencies that exist.
If you’re interested in a popular coin like Bitcoin or Ethereum, you’ll probably find it on any given exchange you’re considering. But newer altcoins, coins with a very small market cap, or meme coins may require a bit more shopping around.
Just remember, these types of coins are often even riskier gambles on top of already highly speculative, more established cryptocurrencies. That’s why many experts recommend sticking with the big names like Bitcoin and Ethereum. With any crypto coin you’re considering buying on an exchange, only trade in a cash value you’re prepared to lose.
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, Ross says.
“What is it that they do to make sure that they continually update you from an education standpoint?” he asks.
Coinbase, 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 will reward you with a small portion of the crypto, which you can then hold or convert to something else. Others offer courses and articles on site to help you learn about crypto markets, history, and innovations, such as Gemini’s Cryptopedia or Binance Academy from Binance.
Storage
Storage can be a divisive topic among cryptocurrency enthusiasts. Many believe in the “not your keys, not your coins,” adage, or the belief that you should hold the public and private keys associated with your crypto holdings yourself, rather than keeping them within your account for the exchange to custody.
However, an exchange that allows you to keep your crypto within your online account can be a good choice, especially as a beginner. Later, once you’ve learned more about storage options or increased your holdings, you may choose to keep your crypto in your own wallet. But Ross warns against exchanges that only allow you to store on their platform, like PayPal. Robinhood recently announced it will be creating a crypto wallet so you can transfer your coins off-platform.
“Once you become a little bit more savvy, you may want to move your coins somewhere else,” Ross says. If you decide later on that you want to move your coins off that exchange — maybe after learning more about storage options you want to keep your holdings in your own cold wallet, for example — you may find yourself stuck if you choose an exchange without that option.
Tax information
As if taxes weren’t already complicated enough, reporting cryptocurrency can add another layer of complexity to your tax return. “As the tax situation evolves around crypto assets, it’s going to be really important for people to make sure that their personal tax situation is up to speed as well,” Ross says.
You need to report any crypto trades you make as capital gains on your tax return. That means you’ll need to know the value of your crypto when you buy it in U.S. dollars, as well as the value of it when you sell.
Because Robinhood only allows you to transact on its platform, it provides a Form 1099-B tracking your cost basis and gains and losses, but that’s not the case on more traditional exchanges.
“When you use cryptocurrency exchanges like Binance, Kraken, CoinBase, etc., they don’t give you that form,” says Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company. That’s because exchanges that allow you to move your holdings off their platform can’t track everything in your personal wallet or trades you make on other exchanges. “That’s when it becomes tricky and when those users have to use a tool to reconcile their entire picture, get the data, and then file their taxes.”
Bottom Line
There are additional factors you can consider based on your own preferences, Boneparth adds, like customer support, how well you like the platform’s mobile app, and how easy the exchange is to use overall. But like we hear from experts time and again when it comes to crypto, taking the time to learn as much as you can before you put money into crypto is one of the most useful things you can do.
Think about the fee structures and security measures you’re comfortable with, what additional steps you’ll take to store your coins, and your goals.
“You probably should spend more time learning about the space,” Boneparth says. “You’re putting risk on your money in a pretty wild environment. It’s one thing to haphazardly put money into more stable markets, it’s a completely other thing to throw money into volatile markets. So it’s important to get educated, especially when you’re going to deal with something that’s perhaps more volatile than other risky assets.”
