It’s a been a wild ride in the crypto market lately. The first reason for this, of course, is that the broad spectrum of altcoins shot up in value dramatically in December, only to crash hard in January. We’ve also witnessed hackers who have targeted exchanges and stolen large sums of cryptocurrency recently. Just this past weekend the Italian exchange BitGrail was robbed of $170M units of Nano.
This second phenomenon makes cryptocurrency investors highly nervous about cryptocurrency exchanges. In addition to experiencing bad service on these exchanges, some investors now feel the burden of ascertaining whether they’re hacker resistant as well. With trading fees on these individual exchanges varying widely, users must mentally calculate cost relative to risk. Nonetheless, new exchanges continue to flood the market as entrepreneurs exploit the burgeoning demand for cryptocurrency. Which of them can you trust with your money?
Large and more established exchanges like Coinbase typically trade only in established coins. Don’t look for the newest altcoin on such exchanges. They’re more interested in holding large market cap coins than offering whatever new fad coin has just appeared. It’s an unnecessary risk to their reputation. Accordingly, users who want a lower risk environment should choose Coinbase an option. Still, user complaints about access to Coinbase’s system and customer service exist, and the exchange charges higher fees as well. Moreover, Coinbase hasn’t entirely figured out how to navigate big crypto price movements, shutting down multiple times when prices become too volatile. This creates a terrible situation for investors unable to withdraw coins that are quickly losing value.
Robinhood is seeking to compete with Coinbase for their users by offering low-fee cryptocurrency trading as a loss leader. Its true goal appears is to attract new and younger investors with crypto and shift them to traditional stock market trading. This allows them to make a profit on margin trading and other ventures. Unfortunately for crypto investors, Robinhood does not allow for depositing coins from other exchanges or wallets, and they will only cash out to fiat currency coins that are purchased through Robinhood. The service they are offering, then, is more experiential, almost a novelty or an introduction to crypto trading.
CoinFalcon, an exchange that went live in October 2017, enables users to deposit coins and perform trading but cannot convert coin to fiat currency. They have to use another exchange for that purpose. As with most exchanges, CoinFalcon only offers trading options on a fraction of the approximately 1500 coins in existence. As a result, investors who hold many different coins are obliged to use a variety of exchanges. Exchanges like Cryptopia typically host new coins, an especially great feature for investors who like to dabble. Still, such exchanges do nothing for investors who value reputation.
Security problems with crypto deposits continue to plague many exchanges, however, and it’s impossible for investors to know how vulnerable individual exchanges are to hacking. Like Coinbase, CoinFalcon has advertised that it holds 98% of its reserve currency offline in order to protect its users from theft. However, the only safe place for currency would seem to be in an investor’s individual wallet. While regular traders may find it convenient to keep their currency in an exchange that provides fast, simple, and low-cost trading, they need to know that any currency not in their possession is vulnerable to hacking. Similarly, those new to crypto should never give passwords or secret tokens to customer support people, no matter how frustrated they are in accessing their coins. Reputable exchanges will never ask for these. They are always social engineering attacks or, in blunter terms, SCAMS.
Investors generally select exchanges for their selection, fees, or ease of use. If they have a bad experience – a technical problem, a money transfer failure, or poor customer service – they will go elsewhere. As market uncertainty abates, new exchanges will prove themselves and bad exchanges will go out of business. If Robinhood and other exchange experiments are successful, large exchanges like Coinbase will have to be more competitive in the future. That means lower fees, greater coin offerings, and better customer service – which can only benefit crypto traders.