Crypto exchanges are a minefield for investors, check out our top tips to avoid risk
CRYPTO is an absolute minefield for investors with volatility weighing on minds.
So how do you negotiate uncharted territory in a world where uncertainty and expansion are the only constants?
Award-winning journalist and entrepreneur Jeff Koyen has been active in cryptocurrency and blockchain as an investor and trader since 2014.
He readily admits that there’s opportunity and money to be made but with concerns around regulation and hacking, those considering their first foray should proceed but with caution.
And he says that Coinbase, the digital currency exchange headquartered in San Francisco, California which trades in Bitcoin, Bitcoin Cash, Ethereum, Litecoin and other digital assets using fiat currencies is already losing ground in what is a very fast moving world.
Popularity is the route of the problem
Investors have been frequently left frustrated after the organisation halted trading on days of extreme volatility but what is this saying about the industry?
“Coinbase is the 1990s-era AOL of the crypto world: a user-friendly on-ramp for newcomers that’s hated by everyone else,” Mr Koyen.
“The fees are too high and performance is too poor.
“Its popularity is the root of its problems, and they can’t seem to add enough capacity. “Their customer service is also fatally inept, which is a huge problem if they expect to onboard more of the general public.
“I recommend Gemini over Coinbase for buying bitcoin and ethereum directly from one’s bank account.
“Coinbase offers credit card purchases, but I don’t think anyone should buy crypto assets on credit.”
With leading brands like Coinbase also facing issues from regulators and banks clamping down on their customers investing in crypto, confidence is at a low currently.
Just a few weeks ago, British customers at Nationwide were left angry after payments were halted after leaving their bank accounts after making debit card transactions on Coinbase.
The reason for this was due to German firm Commerzbank putting a freeze on transactions for crypto investors that translated to holds on customers’ cash.
Risk on investors are not protected
Mr Koyen continued: “No exchange is immune from problems, particularly during market fevers that attract new users. But the best exchanges are good at quarantining system failures.
“On Bittrex, for example, it’s not uncommon to halt the trading of a certain coin or token. The issue might be Bittrex’s own capacity, or it might be a larger technical issue with the coin itself. These brown-outs affect only that coin’s traders, and they’re rarely more than an inconvenience.
“For newcomers, it’s safest to stick with the big players: Bittrex, Binance, Poloniex, Bitstamp, Gemini. Once they’re comfortable with the market dynamics, they can branch out to exchanges like Cryptopia and CoinExchange, which specialize in low- and micro-cap alt-coins.
Accounts are not 100% secured
So with teething problems being evident what are the chief shortcomings of the cryptocurrency exchanges today?
“As we just saw with the Coincheck hack in Japan,” said Mr Koyen.
“No one can 100% guarantee your account’s security. And because crypto assets are not guaranteed by any government agency — there’s no FDIC for bitcoin — most hacks result in irreversible loss.
This is why crypto veterans practice diversification; most traders have accounts on a dozen different exchanges.”
One common issue that for exchanges for bitcoin and other cryptocurrencies is to limit the amount of trading an investor can do over a given period, or to cap the size of an individual trade.
But Mr Koyen says that caps on cashing out “ensures liquidity and prevents the equivalent of bank runs” which invariably happens when sentiment is low as was evidenced last month.
For those looking to invest their cash in good quality exchanges there’s a number of considerations an investor should look at.
Hacking caused problems in Japan
Mr Koyen continued: “Reputable, reliable exchanges require two-factor authorization for its users.
“If an exchange is sloppy with user verification, it increases the likelihood of being hacked.
“I also think an exchange must look good and have an excellent user interface. “Aesthetics may not be as important as security, but when you’re spending several hours at a time clicking through charts and forms, the experience should be painless.”
When it comes to ensuring an exchange’s security against hacking and other problems there’s a few things to keep in mind.
He added: “For starters, reputable exchanges abide ‘know your customer’ (KYC) and anti money laundering (AML) laws.
“This means that, when creating an account, new users are required to provide identification.
“For 20 years, we’ve been conditioned to not volunteer any personal details on the internet.
“That’s still the case on most websites.
Everyone should play ball
“But if you plan to invest real money in crypto, with the goal of taking real profits, stick to exchanges that play ball with the government. If they take shortcuts with KYC/AML, they’re probably taking shortcuts elsewhere, like security.”
So with so much uncertainty yet so much appetite out there from investors keen to become involved, should the future of the industry be underpinned by regulation?
“It depends on the exchange and its features,” Mr Koyen continued.
“If it offers direct-to-bank funding, then probably yes. I also have no problem with KYC and AML laws.
“But I’d hate to see crypto’s Wild West edges sanded down by regulation. The low-cap alt-coin markets, for example, should continue to be wild and wooly, not unlike penny stocks. Investors must come to crypto with eyes wide open and remember that there’s no FDIC for bitcoin.
If they can’t stomach the risk, they should stick to traditional products that provide more controlled exposure to crypto assets.”