How to Choose the Right Bitcoin Exchange

Most Bitcoin exchanges operate in a similar fashion. If you want to trade in Bitcoin, then, it’s a matter of choosing which exchange fits you best.

When you’re comparing two or more Bitcoin exchanges, here are some questions to ask:

  • What currencies does the exchange handle? If you live in the U.S., you want to be able to trade Bitcoin for dollars; if you live in Europe, you’re more interested in using euros. Given that many exchanges are located outside your current country of residence, make sure you’re dealing with one that works with your native currency.
  • How can you fund transactions? Most exchanges handle electronic bank withdrawals and wire transfers, which are fine. (You might need to link up your bank account in advance of your desired transaction, however.) Other exchanges let you pay for the Bitcoin you buy with PayPal or your credit cards. Pick an exchange that lets you pay how best you want.
  • How fast are transactions executed? Immediately is good. (Or at least within the normal 10-minute Bitcoin verification process.) Beware of any exchange that takes days to complete your trades.
  • What transaction fees are charged? All other factors being equal (which they often aren’t), choose the exchange that charges the lowest transaction fees. These fees vary wildly from one exchange to another, so this is a big deal, especially if you’re doing a large volume of trading.
  • How big is the exchange? In general, the size of an exchange is an indication of how safe the exchange is. (This isn’t always a reliable indication, though; Mt. Gox was far and away the largest Bitcoin exchange before it imploded.) Look at the number of transactions the exchange conducts, as well as its liquidity. You want an exchange that won’t get bogged down as volume increases, and that has the reserves to back up its transactions.
  • How secure is the exchange? This last factor is difficult to judge, so you might just need to go on reputation. Obviously, size is a factor in this but do a little online research, especially with lesser-known exchanges, before you commit. At the end of the day, the safest choices are probably the most well-known exchanges—the Big Five that are discussed next.

Exploring the Big Five Bitcoin Exchanges

With more than a hundred Bitcoin exchanges operating in dozens of countries, it’s difficult to choose one over another. That said, there are a handful of Bitcoin exchanges that have risen to the top of the pile, in terms of both size and service. Not that there’s anything guaranteed in the world of Bitcoin, but these appear to be the most stable and reliable exchanges today.

In short, it would be hard to go wrong with trading on any of the Big Five Bitcoin exchanges—Bitfinex, Bitstamp, BTC-e, Coinbase, and Cryptsy. Let’s look at each, in alphabetical order.

Bitfinex

Bitfinex (www.bitfinex.com) is one of the larger virtual currency exchanges, based in Hong Kong. It enables the exchange of Bitcoin and Litecoin (LTC) for U.S. dollars, or for each other.

The Bitfinex exchange.

The Bitfinex exchange.

This exchange is different from most others in that it allows you much more leverage on your holdings than you get at other exchanges. You also get more freedom of action, by enabling limit, market, stop, trailing stop, and fill/kill orders. Bitfinex also lets you borrow, resell, rebuy, or close short Bitcoin and Litecoin.

In terms of fees, Bitfinex uses what is called a maker-taker system, in which the market maker pays between 0.1% and 0% and the taker pays 0.2%. On the downside, Bitfinex has relatively low liquidity (that is, they don’t always hold as many Bitcoin as some think they should), and has experienced some operating glitches in the past. They have been improving their security, however, and have covered any losses incurred as a result of their own coding errors. And those low fees, combined with an easy-to-use website, make this an attractive exchange for many.

Bitstamp

Bitstamp (www.bitstamp.net) is a UK-based Bitcoin exchange. They trade upwards of 20,000 BTC per day, which makes them one of the highest-volume exchanges today; they also have fairly high liquidity. I’d rank them near the top in terms of security, safety, and reliability.

The exchange’s fee structure is volume based, ranging from 0.5% to 0.2% of the transaction. This makes their fees a little higher than those of some other exchanges. In addition, they trade only BTC and U.S. dollars, no other virtual or traditional currencies.

The Bitstamp exchange.

The Bitstamp exchange.

BTC-e

BTC-e (www.btc-e.com) is a Bulgarian-based cryptocurrency exchange. They currently trade Bitcoin, Feathercoin, Litecoin, Namecoin, Novacoin, Trade Reference Currency, Peercoin, and Primecoin for each other and for euros, U.S. dollars, and Chinese yuan. The exchange also enables users to have withdrawals sent directly to their MasterCard and Visa card accounts.

The BTC-e exchange.

The BTC-e exchange.

The BTC-e exchange charges a 0.2% fee for most transactions. They have a fairly large trading volume (around 15,000 BTC per day) and high liquidity.

This is a very fast-moving exchange that often leads the market in pricing—especially during rapid market movements. On the downside, many have complained about BTC-e’s website being buggy and needing to be automatically refreshed to display the latest pricing.

Coinbase

Coinbase (www.coinbase.com) is on its way to being one of the biggest Bitcoin exchanges on the Internet. This San Francisco–based exchange is backed by more than $25 million in venture capital and is arguably the safest of all exchanges today. (I particularly like the fact that they keep 97% of their holdings in offline storage—very smart.)

The Coinbase website is also one of the easiest to use, especially for beginners. To buy Bitcoin, you first link your bank account to Coinbase (by providing your account number and routing number) and then send money to Bitcoin at the currently offered price. After you’ve built up some trust (30 days after your first successful transaction), you can add a credit card to your account for “instant buys” of up to 1 BTC per day. Coinbase also acts as an online Bitcoin wallet that can store all the Bitcoin you purchase.

Coinbase exchange.

The Coinbase exchange.

Although Coinbase makes it quite easy to buy and sell Bitcoin, some people claim it isn’t a true trading exchange. That’s because you can place only market orders (that is, buy or sell at the current market price) and not limit orders. That makes the operation more straightforward for beginning and casual users, but doesn’t necessarily suit the needs of more experienced or frequent traders.

The other drawback to Coinbase is its fee structure, around 1% for most transactions, which is considerably higher than with other exchanges. That’s probably not a problem for casual traders, but it’s a huge turnoff if you’re trading daily.

Cryptsy

Cryptsy (www.cryptsy.com) is a Florida-based cryptocurrency exchange. They operate in 200 markets and deal in more than 150 virtual and traditional currencies. They’re a fairly big exchange, trading between 2,000 and 4,000 BTC on a typical day.

The Cryptsy exchange.

The Cryptsy exchange.

The fees here are reasonable but not the lowest around, 0.2% for buys and 0.3% for sells. They use two-factor authentication and their security is top-notch. The Cryptsy website originally got a reputation as being glitchy and difficult to use, but that’s old news; they’ve made a lot of changes over the past several months, all for the better.

Not Too Big to Fail

The biggest Bitcoin exchanges today might not be the biggest tomorrow. Certainly, many of yesterday’s biggest exchanges have fallen off the table completely.

The best example of how things change concerns the notorious Mt. Gox. Before the start of its decline, in mid-2013 or so, Mt. Gox accounted for 80% or more of U.S. dollar-based Bitcoin trading. Today, of course, Mt. Gox is no more, having gone bankrupt due to a combination of bad business practices, bad technology, and bad security.

So trading with one of the larger exchanges is not necessarily a guarantee of security, because even the biggest exchanges can fail. That’s different from the U.S. banking system, which is protected by the FDIC and a larger mentality that the big banks are simply too big to fail. In the world of Bitcoin, there are no guarantees, and nobody is too big to fail.

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