Submission article from Kester Wong
You might be wondering why people have been describing the cryptocurrency space as the wild west. Just a few years ago, cryptocurrencies were (still are) shrouded with legal and ethical debates, citing the lack of transparency, money laundering, financing of terrorism, etc. That seems like ancient history today, the total market cap for cryptocurrencies have ballooned (from $188 billion on 02nd Nov 2017) to a whopping $0.5 trillion (as of 13th Dec 2017) industry since then; we are scratching only the surface.
So, I will share my thoughts with a specific focus on how people have been buying cryptocurrencies in the past, so that you can benefit and be better equipped with knowledge and awareness that could be life-saving in unpredictable times, especially in the volatile crypto market.
Before Bitcoin was known and reported in mainstream media, it appealed to the programming/code enthusiasts, the misfits, those who see things differently. Bitcoin was at its infancy and those who believed in the blockchain technology often believed in the long-term value of this coin, hence the proliferation of physical Bitcoin that is also highly desirable. It was so cheap you could buy it from Bitcoin forums, where anyone could almost carelessly purchase BTC from any random stranger without worrying too much of being scammed (at the time Bitcoin was not the hot item to be exploited by scammers). This was usually done with an escrow (i.e. a third party trust/custody), although it was common to see transactions without a trusted third party too. Other than that, those who are tech savvy would find it easy to purchase Bitcoin on eBay, or at local Bitcoin ATM machines in some cities.
Part I: It is no doubt that cryptocurrency exchanges have mushroomed, and then subjected to hacks [Mt. Gox, Bitfinex, Bithumb] and government regulatory interventions. However, all these did not stop exchanges from improving their security robustness and innovate. As a result, you see exchanges come and go within the last five years. It is not uncommon to see incompetent exchanges get weeded out by innovative, fair, and functional exchanges in a year. Below, I provide a few guidelines to help you decide which exchange(s) might be suitable for you:
1) Ambiguity: Beware of misleading and deceptive marketing materials posted by exchanges. Why?
I have fallen victim of misleading (even borderline scammy) exchanges. This is especially true four years ago when there was no “standard” set in the industry. Exchanges charged however much they deemed appropriate, which resulted in a huge discrepancy in rates and fees in exchanges around the world. For instance, iGot (now rebranded as Bitlio) advertises very competitive rates on their website, but you will be surprised to see totally different rates and fees once you sign up and log into the exchange. There have been countless user rants from bitcointalk and reviews from TrustPilot, alerting misleading marketing strategies employed by various exchanges.
Take another instance, Whaleclub has a 30% “bonus” for new users who register and trade there, this might sound like a great incentive but in actuality, what you really get is a deduction of your trade losses (of up to 30%). It means that you are still subjected to their fees and the 70% losses if any.
2) Understand the robustness of the exchange. How?
Exchanges that do not innovate often allows you to register using just an email and password, without know-your-customer (KYC) or other anti-money laundering measures. In terms of structural robustness, it is easy to find out how well an exchange performs during a market crash/pump. One key attribute that separates a good exchange from a bad one, is that a responsible exchange will notify its users about scheduled downtime, server maintenance, etc. Over crowded server traffic is almost inevitable in any exchange during a market crash, but a responsible exchange will not hesitate to come out and tell their users (via email, tweet, or exchange) that they are facing certain issues and are working towards solving it.
3) Understand how the exchange stores crypto assets.
Hot or cold wallet? or both? While there are certain downsides of using cold wallet (e.g. slower access than hot wallet), it is much more secure. After all, hackers cannot steal from your exchange if the crypto assets are not connected to the internet, right?
4) Avoid misleading fee structures
Below I give an example where Bitlio (previously iGot, an Australian based exchange) offers a $10 credit with your first Bitcoin purchase, and also advertised a 0% transaction fee, but once you get to see the exorbitant sell/buy prices, it ends up costing more than $10 for a purchase.
One of the misleading fee structure might include a claimed transaction fees of “as low as 0%”, while in actuality is a far cry from what was claimed. Another misleading information is that cryptocurrency transactions off exchanges are inherently instantaneous, however such “fast deliver guaranteed” might sound like a premium feature to the unknowing new crypto enthusiasts. Screenshot taken from Bitlio exchange.
As a Malaysian myself, having lived in Australia and now working in South Korea, I am familiar with the fee structures in exchanges from these regions. For starter, majority of the exchanges in Australia have trading fees ranging from 1-3%, which is ridiculously high when compared to other exchanges in South Korea that generally charge 0.01-0.1%. Even better, there used to be a good period of time where the major exchanges in China do not charge a fee for trades.
5) Know the key people behind the exchange. Who?
I could not stress how important it is to know who runs an exchange, from the CxOs (Chief x Officers) to the investors behind the exchange. I would like to point out that looking at the myriad of exchanges, on one end, we see government-approved cryptocurrency exchanges, but we also see unregulated and unlicensed exchanges on the other spectrum. Some exchanges even went out of their way to shield any piece of information that would disclose their location and the people behind it. A good industry example would be an exchange backed by a number of multinational high profile angel investors, and consists of a management team of ex-bankers, at least some personnel from the finance industry (check out the Australian exchange Independent Reserve, one of the very first trading platform that resembles the conventional trading platform). A couple of sketchy examples would be Poloniex and Bitfinex, where their physical locations remain unknown to date. Somewhere in between, we have the controversial iGot CEO that got into legal trouble for being accused of taking users’ money – in the end, attracting media coverage.
6) Understand the registration procedures, and the underlying security measures taken.
It is increasingly common to see exchanges to adopt a few security measures during the customer registration, these include a slew of jargons, so it does not hurt to be well versed and know-your-jargons (KYJ) in the crypto space. In essence, exchanges that do full KYC (Know Your Customer/Client), AML (Anti Money Laundering), and CFT (Combating the Financing of Terrorism) measures, generally comply with the country of every participating individual. Otherwise, the FATF (Financial Action Task Force) and other means of full KYC can be employed. It is thus foreseeable that for every exchange that processes fiat currency, it will be regulated in such manner. Below is a snapshot that highlights the importance of KYE and KYC, amidst the current Bitfinex and Tether scandal.
7) Where? Is the exchange localized? Or multinational?
Before I landed a job in South Korea, I have already been paying attention to the crypto space for awhile, it was a very small community where the key figures can be remembered easily. It was Barry Silbert’s DCG investment relationship with Korbit (and many other exchanges later in the future) that made me decide to put my money and trade actively on the exchange. However, it never hurt to enforce KYC (“c” for competitors) for the exchanges, so naturally, the idea of registering for an account on all the other “good” exchanges does not sound so uncommon anymore.
There is a multitude of benefits in having access to multiple exchanges:
i) liquidity (which will be discussed in the next point)
ii) arbitrage opportunities
iii) risk management
iv) diversification of investment (as some exchanges do not offer certain crypto tokens)
v) geo-specific advantages. For instance, one can benefit from the extremely high trading volumes of certain coins in Korea, but that is another story to be told),
vi) another geo-specific convenience is that I work in Korea, hence it is natural for me to be actively using Korean exchanges. However, if I am going to be spending a month in Australia (my second home) I can always cash out some money from Australian-based exchanges, and thirdly as a Malaysian I find it really convenient to also keep a Malaysian-based exchange, to send funds to my family).
8) Market presence and diversity. What are they?
The game is changing. 2018 will no longer see highly-localised exchanges thrive. What we will see more, however, is more partnerships and mutual growth of cross-country exchanges. This was previously impossible due to the significant differences in the financial regulatory barriers. What we will see is cryptocurrency exchanges having real brick and mortar operations in different locations, which I believe will most definitely give users a boost of confidence, knowing that they could get local support from at least a few countries, if needed. This novel approach of having presence in distinct geolocations will provide an added benefit for people who want to trade cryptocurrencies in these countries, or provide hassle-free transition for the modern digital nomad who always travel and work from different locations. To give you a few examples, there are a select few blockchain companies worth mentioning here:
1) Luno has offices in London, Singapore, and Cape Town. That gives you a general idea of just how far-reached their savvy user base has become; stretching from Indonesia, Malaysia, Nigeria, Europe and to South Africa. That is a very significant outreach offered by a single institution, keeping in mind that this is not just a crypto to crypto trading services but also allows fiat deposit and withdrawals for its users.
2) A major Japanese cryptocurrency exchange, bitFlyer, recently launched in the US, with approval to operate in 42 states! To give you an idea how intricately different can the regulations be in the US, the Gemini exchange (by the Winklevoss twins) has approval to operate in 46 states, while Coinbase has approval to operate in 48 states. BITPoint, another Japanese exchange that belongs to Remixpoint (a publicly listed company in Japan) is set to enter Taiwan in January 2018. The very same company also brought trading to South Korea last month, as Bitpoint Korea. It is worth noting that bitFlyer and BITPoint, along with nine other Japan exchanges, are all licensed and regulated by the Japan Financial Services Agency (JFSA).
3) Huobi, the previously shut down cryptocurrency exchange (by the Chinese regulatory body) is currently working closely with their South Korean and Japan counterparts, so it will not be surprising to see this exchange soon provide liquidity between the China, South Korea and Japan markets.
To sum up market diversity, the beauty of having a single exchange that diversifies into multiple countries also translates to having the privilege of being able to trade in multiple currency pairs. Most other exchanges I have used are so geo-restricted they only provide BTC/USD or BTC/AUD pairs. Yet ironically, some even call themselves the top/best-in-class crypto exchange. For instance, Luno provides tradable currencies in EUR, SGD, IDR, MYR, NGN, ZAR. Never heard of these fiat currencies? No worries, because we will soon be seeing more familiar currencies such as USD, RMB, KRW, JPY being offered.
9) Understand which exchanges have a cryptocurrency-friendly support from the regulatory body? How likely is an exchange scrutinized by the government or regulatory body?
Depending on where you are, you might want to regularly follow up with the local government’s stance on cryptocurrency. Given the nature of the fast-paced cryptocurrency market and the inherent complexity in initial coin offerings (ICOs), a lot of things can happen within a short span of time. Let us bear in mind that this is a relatively young industry, one that involves intricacies in economic policymaking.
A US-based exchange, Coinbase, recently came under pressure from the US Internal Revenue Service (IRS) to submit any transactions larger than 20k USD. That means they are legally required to hand over customer taxpayer ID, name, birth date, address, etc to the IRS. As the court case is still ongoing, one would have to think carefully before choosing which type of exchange that would be best for you. The California federal court issued document can be found here.
As South Korea becomes the hotbed for cryptocurrency trading, the government is also becoming more concerned about the long-term impact of cryptocurrency on the nation’s security. This is a sound concern, given that the country has an urgent agenda to be skeptical; to ward off cyber attacks from North Korea; to punish careless exchanges that leaked customer details; to protect local investors from scams and ponzi schemes.
With all the sentiments addressed above, it is therefore useful to know if your exchange adopts a pro-regulation stance, or is it compliant with any regulation. Moving across the sea, we have Japanese exchanges that are now regulatory compliant. Other exchanges around the world are expected to start adopting a more pro-regulation stance on cryptocurrency. Recently, eleven of the licensed and regulated cryptocurrency exchanges in Japan have agreed to cooperate with the National Police Agency in fighting crypto-related cyber crimes.
A serious tone to the Police-Exchange agreement
Here’s a lighter tone to the agreement signing ceremony. Eleven of the licensed and regulated cryptocurrency exchanges in Japan, all in one picture.
10) User experience of the exchange platform: tools and functionalities
Although the top performing exchanges are offering fairly advanced and modern user interface and experience, half-baked and dysfunctional exchange platforms are still rampant. I have actually written about an exchange releasing their trading platform full of bugs and half-baked features before.
What is the point of selling your crypto asset on an exchange that does not have buyers? The above is just an exaggeration, but my point is, it is often much better to be buying/selling at an exchange that provides sizeable amount of buyers/sellers. Screenshot taken from BTCC DAX exchange, during its first week of launch.
11) Exchange-customer relationship
Some exchanges are known to be having a sub-par customer service, while there are more exchanges that are now focusing more on the exchange-customer relationship. The benefit of choosing an exchange with a strong focus on the community is that there are incentives for them to better-connect with their clients, which goes a long way in retaining customers. Also, new and growing exchanges often bring in new forms of bounty programs and local meetups with their community to foster a long-lasting relationship. If there is no customer support provided by the exchange, then cryptocurrency forums can be a very resourceful portal in helping us resolve any issues.
12) Exchange-Exchange relationship: Partnerships and the relationships it has with other crypto-related institutions.
You may wonder why does this matter at all for customers. A good exchange will have a lot of business partnerships with other exchanges that will potentially lead to partnership marketing events that further incentivizes users to use the marketed products and services. This can be in the forms of airdrops (token giveaways), rebate, rewards, fee discounts, etc. An exchange that expands their partnerships with other exchanges will also solve liquidity issues in exchanges to some extent.
13) Understand how well does the exchange take responsibility in addressing and solving market issues such as trading “glitches” and flash crashes, which is common in the crypto space.
Bitfinex recently came under the spotlight when users reported that their positions were liquidated at the wrong position, i.e. positions were not liquidated at the correct levels. There have also been reports where exchange executed orders without user consent. Touching on this, I would like to also point out the risk of placing a Stop Loss in your cryptocurrency trades, as many experienced traders would swear by it. However, one major flaw that voids the protection offered by Stop Losses can be summarized in one word; volatility. Something that every cryptocurrency traders should be aware of, is that the crypto market can have up to 90% of “flash crash” that could wipe out the majority of positions, within minutes [Bitfinex crash]! I am in no way advocating the nullification of Stop Losses, but this risk is something we should take into account.
Here I quote Bitfinex’s stance on flash crash:
“When the loss of a position causes the leverage ratio to become lower than 15%, the platform will liquidate positions. This is clearly disclosed in our terms of service. This may result in all collateral held in an account being used to cover losses incurred. During volatile markets, slippage can be substantial.”.
The extremely volatile market of crypto means that often times, when a coin is experiencing a flash crash, the price will go back up within a short amount of time (hence the term flash). Thus, the exchange’s decision to liquidate user positions in a flash crash is actually doing the opposite of “covering losses” because users will get wiped out and bear significant losses, only to see the affected coin go back up in value.
14) Last but not the least, find out how solid is the exchange community.
Solid is no longer enough, in fact 2017 was swarming with “solid” communities. 2018 will see crypto communities that go beyond the comfort zone to provide self-help to other fellow crypto enthusiasts. A great exchange community will not only give you hands-on support and technical help with using the exchange, but also support in many other ways. It is not uncommon to make a few good friends when you meet like-minded people from all walks of life.
In terms of industrial standard, the Cryptocurrency Security Standard (CCSS) has been introduced to closely complement the existing information security standards (ISO 27001:2013). In essence, the CCSS encompasses 10 aspects that holds, transacts, or accepts cryptocurrencies, which are then categorized into three levels of security robustness. This set of regulations should be applied to any cryptocurrency related platforms such as exchanges, marketplaces, games, wallets, payment processors, etc.
SUMMARY: Just a few years ago, it was a taboo topic to speak about over a meal or coffee with friends and family; it was frowned upon. Today, Swiss banks are selling bitcoins, electronic conglomerates in Japan and real estate providers in Dubai are accepting Bitcoin as form of payment, graphic card manufacturers have to open up an entirely new sector of graphic cards catering for cryptocurrency miners (not to disrupt the gaming industry that is already lacking in graphic cards), millennials or teenagers openly pronounced themselves millionaires from the garage investments they “naively” made a few years ago. I believe you should only invest into things that you would foresee yourself using at some stage in your life, and have a good faith in the people behind it. By good faith, I mean an educated analysis and an understanding of potential risks involved.
Disclaimer: The author has not received any form of monetary compensation from the publication of this article. This article should not be taken as investment advice. Please conduct a thorough research before investing your money in any cryptocurrency exchange.