In this article, we review some of the key factors that differentiate an honest exchange from a dishonest one in an attempt to help traders make educated decisions before depositing their coins. Though technology is advancing at an ever-increasing rate, human behavior has remained roughly the same through the eons; even when masked through the anonymity of the internet and cryptocurrency, they can still be identified and categorized.

Crypto Exchange Losses Peaked in 2018, On Track To Be Surpassed in 2019

Despite an increasingly regulatory atmosphere, cryptocurrency exchanges are just as ripe for fraud and abuse as ever, not to mention hacks and curious thefts. Approximately $1.8 billion in crypto assets were lost as the result of exchange hackings and scams in 2018, and with major exchanges like QuadrigaCX and Cryptopia falling victims to massive losses this year, this amount is likely to be surpassed by the end of 2019. This means it is now more important than ever to choose the right exchange before transferring your coins around for trading. Choosing an exchange just because it offers a competitive price on the coin you want to change is often a bad idea, and it is wise to settle for security over profits, which can otherwise be a hard lesson to learn.

Though some good, honest exchanges on occasion find themselves the victims of a hacking or human error, there is enough competition out there to avoid having to settle for second best. There are several, prominent exchanges which have never been hacked and proven themselves to be trustworthy after having weathered through years of ups and downs in the business. Below, we offer you some pointers on how to determine the qualities of a good exchange and spot the deficiencies of a bad one. Ten years after its inception, cryptocurrency trading is still very much a “wild west” type enterprise, where safety can never be 100% guaranteed; however, we can identify the traits possessed by a sheriff versus those possessed by a bandit.

Signs of a Good Exchange:

  1. Highly reputable. Look for exchanges that have been in business for a number of years without many user complaints. Do they have a history of honoring customer deposits, withdrawals and other trading issues? Have they been the victims of hackings or theft in the past? If so, how did they handle these issues? In its early days, the Poloniex exchange was the victim of a major hacking and was forced to take a “haircut” of all user funds in order to have the liquidity to remain in operation. However, over the next few years they managed to pay back all of their customers, and have since grown exponentially, being acquired by Circle in 2017. Today, Poloniex is one of the oldest, most trustworthy exchanges in the altcoin business, doing approximately $9 million in trading volume every 24 hours.
  2. Strong community support. A user base that doesn’t just tolerate an exchange but is very vocal about how much they like it is a good sign. Active communities in social media who are sincere in expressing their satisfaction with an exchange means they probably are willing to advertise it for free because they find it to be a valuable resource. Of course, positive rating, feedback, and testimonials can all be faked, so you may sometimes have to use detective work or reliance on your ability to suss out inorganic praise in order to determine the actual credibility of the source.
  3. Legitimate (non-faked, non-manipulated) trading volume. Unfortunately, most exchanges engage in some type of trading volume manipulation in order to make their exchange appear more popular than it actually is. In addition, many projects employ market making services and bots to trade their own coin to inflate their volumes. While the second part may be unavoidable regardless of what exchange you choose, a list of exchanges which have been determined to be honest about their trading volume can be found here.
  4. Fast, responsive customer service. Answering customer questions/concerns/complaints is always a must for any exchange that wants to be legitimate. There’s no faster way to start garnering scam accusations than by ignoring your customers. Good exchanges won’t take more than 24 hours to respond to a customer support ticket. It shows they value your business and want to keep you as a customer, hoping that you will recommend their service to your friends; perhaps even one day grow into a whale and use their exchange to perform your trades.
  5. Properly licensed & publicly accountable. Does the exchange have a license to do business that can be publicly verified? Are its company leaders known? Do they have online presences apart from a LinkedIn profile or a Twitter account? If so, there’s a good chance that means they are fully invested in the success of their exchange and are willing to risk their credibility if something goes awry. If worse comes to worse, this also means they can be investigated and/or sued should they decide to take off with customer funds or fall into bankruptcy.

Having said all that, here are a few “good exchanges” that we can safely recommend to you. They have all been in the game for long enough to establish themselves as trustworthy and are more-or-less held in high regard by the crypto community in large:

  • Binance: has it all: low fees, huge assortment of coins, and doesn’t require KYC for small to medium-sized withdrawals
  • Coinbase: one of the only federally insured exchanges, completely compliant with U.S. regulations, never been hacked
  • Bittrex: an older crypto exchange based in San Francisco, has top notch security, competitive fees, and an excellent coin selection, doesn’t require KYC for small withdrawals
  • Poloniex: also based in the U.S., regulated by the New York Dept. of Financial Services and extremely legal compliance-oriented
  • KuCoin: somewhat of a clone of Binance, features several smaller coins not readily found elsewhere, never been hacked

Signs of a Bad Exchange:

  1. Questionable online reputation. Are there more than a handful of bad reviews online for an exchange? Does the general trend of reviews paint a picture of shady behavior across the time frame of its existence? If so, and despite however professional or well-used the exchange may seem, it is probably better to steer clear from it and seek an alternative.
  2. Lack of community and community support. Does the exchange seem to be devoid of users willing to share their experiences with it online? Does its social media activity appear to be fake or forced? Is there more negative discussion about the exchange in prominent crypto forums than positive? If any of these are true, it might be a sign you are dealing with a less-than-trustworthy exchange. If nobody appears to be proud about using a particular exchange, then in all likelihood neither should you. Every exchange is going to receive its fair share of “haters” and those that experience problems with it, but if an exchange only has haters, it’s probably for a reason.
  3. Manipulated trading volume. As we mentioned in a recent article, the majority of all bitcoin trading volume is faked by exchanges seeking to attract attention to themselves. This behavior is a substitute for being able to attract attention on an exchange’s own merits, perhaps suggesting that it should be avoided. Big buy/sell spreads, consistent trade sizes and volumes and non-round traded amount figures are all signs of an exchange that is manipulating itself.
  4. Poor customer service. There’s nothing worse than an exchange with a poor attitude when it comes to customer service. Ignoring complaints and inquiries, failing to provide clear or logical answers to questions and outright belittling their user base is no way to run an exchange. You might be surprised, but a lot of exchanges regularly engage in all 3 of these activities
  5. Unlicensed & anonymous team. This might go without saying, but it’s much easier to avoid prosecution if you aren’t bound to do the right thing by any legal agreement and there’s no names to be found when attempting to serve lawsuit papers. Can you find some sort of government-issued business license with your exchange? Can you identify its owners, operators or staff, place them to any online presence, or otherwise find means to hold them accountable should they run away with your money? If the answer is “no,” you may want to consider avoiding the exchange. Everyone knows that Satoshi Nakamoto was anonymous, but he wasn’t running a business, so it’s no good excuse for the creators of an exchange.

Common Ploys Used by Bad Exchanges

An underhanded tactic frequently used by bad exchanges is making offers that are too good to be true. For example, an exchange may advertise low trading fees (0.1% or less), but only after a user has deposited their coins and tries to make a withdrawal that their withdrawal fees are exceedingly large. Though not a new practice by any means, many exchanges make the majority of their profits from their withdrawal fees – not from trading fees – which means you should research these fees on the exchange before depositing coins there. For instance, the exchange Trade Satoshi supports a lot of smaller coins which can be traded for bigger ones, but once you do, you may realize you have made a mistake. Taken from their current Fee Structure:

Trade Satoshi Withdrawal Fees (fee amount in coins x price of coin)

  • USD Coin (USDC): 10 x $1.00 = $10.00
  • Gemini Dollar (GUSD): 10 x $1.00 = $10.00
  • Bitcoin Cash (BCH): 0.0201 x $167.94 = $3.38
  • Bitcoin SV (BSV): 0.1701 x $64.28 = $10.93
  • Binance Coin (BNB): 0.5 x $16.72 = $8.36
  • Tron (TRX): 150 x $0.02353 = $3.53

Another tactic used by shady exchanges is reporting unusually high trading prices to sources like CoinMarketCap and CoinGecko in order to lure in new traders seeking to make a seemingly quick and easy profit. A user might see that BTC is trading at a $300+ premium on one exchange, deposit a few bitcoins there, then find themselves stuck not being able to withdrawal their fiat, Tether (USDT), or other coin because of unforeseen restrictions barring the withdrawal. Here are some exchanges that have multiple scam allegations against them and their current reported price for BTC (compared to the average price of $4,095):

  • LakeBTC – BTC/USD: $4,706 (13% premium)
  • BiteBTC – BTC/USD: $4,585 (12% premium)
  • Exrates – BTC/EUR: $4,314 (5.3% premium)

The same thing could be said for exchanges which offer prices that are too low – it may look like there is a fire sale going on, but usually there is a reason why the prices are the way that they are. In short, there’s no such thing as easy money when it comes to arbitrage opportunities in the crypto markets. When something looks too good to be true, its likely not, and there’s a reason behind it.

Potential Pitfalls of KYC

Last but not least, consider Know Your Customer (KYC) procedures to be a double-edged sword: they are almost always there to protect the exchange and not the customer, but on the other hand, several exchanges will require them before any trading can be conducted on their site. Some exchanges have recently been requiring KYC for all users after historically not doing so, using it as an excuse to lock customers who don’t comply out of their funds and cancelling their accounts without any sort of opportunity to appeal the decision.

So, if you find an exchange with a competitive price and volume for a coin you want to trade but see they require user KYC before trading, be sure to do thorough research on what the internet has to say about the exchange before sending your documents or coins. Some exchanges are honest and handle KYC professionally, others are not so honest and will steal your coins as well as sell your personal information. If it is difficult to find the difference between the two, stick to exchange trusted by the community, a few of which we mentioned above.