As digital currencies such as Bitcoin, Ethereum, Bitcoin Cash and XRP gain legitimacy, it's natural for investors looking for asset diversity to dip into this newest of asset classes. Recent price declines across the cryptosphere might also tempt traders looking for good entry points.
But negative headlines about cryptocurrency scams, dodgy exchanges and other criminal schemes have left many reluctant to enter the space. And indeed, from scaling issues to safety on the operational and technical side of trading, there are a number of things even savvy investors should be aware of.
After reading this post, one reader recently tweeted:
"Where is the safest place to buy XRP?"
For all cryptocurrency trading, Casey Kuhlman, CEO of Monax, says, begin by considering the credibility of the exchange and focus on the software. He stresses that “trust and credibility” are perhaps two of the most important factors to focus on when deciding on the best crypto exchange to work with.
“I would recommend that regardless of the exchange chosen, all users install reliable antivirus software, in addition to applying operating system patches and antivirus definition updates as soon as they are released. Users should always ensure that they’re backing up their data to offline storage sites on a regular basis. As with all transactions done online, I would recommend using a VPN - virtual private network - to trade, as your wifi isn’t always as secure as you think.”
When purchasing cryptocurrency, Paul Puey, CEO and co-founder of Edge, notes that there are many and varied choices. Best options will depend on a user's desire for security, cost, speed, and simplicity.
“On one end of the spectrum are fully centralized order matching exchanges, which can give you very close to spot prices but require understanding trading order types and may have long delays in account verification and withdrawal. They also compromise security, due to funds being held by a custodian. With central exchanges it is important after trading to move funds onto a user-controlled wallet.”
Daniel Schwartzkopff, CEO, Invictus Capital provides additional detail on the a number of things to keep in mind when choosing an exchange. He provides nine factors to note:
- Try to choose a major, established exchange that has been around for some time. The duration of the exchange's operational life is not necessarily a guarantee of future safety, but it does eliminate the risk of fly-by-night operators.
- Make sure the exchange has significant volume and liquidity in the chosen pair you are looking to trade.
- Before signing up, send a query to their customer support team to get an estimate of how long they will take to get back to you and see if you are comfortable with that timeframe.
- If it's your first time doing business with an exchange, never immediately deposit the full amount you are looking to trade. Rather, start by depositing and withdrawing a small amount first.
- If you need assistance, always email the exchange's official support team. Bear in mind that the admins will never initiate a conversation with you on apps like Telegram. If you are approached in this way, it's almost certainly a scam.
- Always type in the full website address. Never choose it from a list of results in Google as some of the ads you see may be phishing sites.
- Regulated exchanges such as Liquid.com (Japan), Bitstamp (Luxembourg/EU) and others provide an additional layer of safety. Always do your research on the exchange before depositing funds. A quick Google search can often determine whether an exchange is currently facing issues or not.
- Make sure the exchange performs KYC (Know Your Customer) procedures. This is a universal legal requirement. KYC procedures may include taking copies of your ID, proof of residence and so on.
- Most importantly, never permanently store your funds on an exchange. Crypto assets should always be kept in a cold storage wallet such as a Ledger Nano device or on a computer that's not connected to the internet.
Cold vs. Hot Storage
Perhaps the most important security decision any crypto investor can make is whether to leave their assets in 'cold storage' says Cobus Kruger, CEO of Stackr. The term means keeping digital assets offline, on a USB drive, for example or other data storage option. Storing cryptocurrency on an exchange is often referred to as 'hot storage.' He points out that both methods have their problems:
“There are issues around both. The ideal scenario is to use third party storage at an independent custodian [which could also] provide access to capital and digital asset investments in a single place.”
Crypto exchanges are also evolving, according to Stefan Neagu CEO of Persona, which means security keeps improving. Despite this he continues to believe that investors aren't focused on putting their own security first. “I doubt that most people would choose the most secure exchange, if the higher volume is on another exchange, even if it's less secure.”
Disclaimer: The information provided above is for research purposes only. It should not be taken as a recommendation or endorsement. Do your own due diligence.