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EducationalOctober 26, 2020

What To Look For When Picking A Crypto Derivatives Exchange

Shubham Goyal
Product Specialist
October 26, 2020

The decision of selecting the right cryptocurrency exchange is one of the most important initial steps that a crypto trader (or crypto investor) must take. A wrong decision could mean a lot of wasted efforts and hassle.

While searching for the right exchange, investors must know what their goal is. Clarity on whether you want to invest for a longer-term, or to trade in and out of positions regularly, is crucial.

There are spot exchanges where investors can buy and sell actual digital assets themselves. On the other hand, traders might find interest in derivatives – trading instruments such as futures and options based on the price action of their underlying spot assets. These products trade contracts based on the price of underlying assets, and may be settled in cash or digital assets, based on the exchange. These contracts, however, are local to the exchanges hosting them, meaning they can’t be transferred to other crypto exchanges. After the trader has determined his or her objectives, it is often crucial to research aspects like regulations, exchange security, and several other aspects. Below is a list of essential areas to look into when choosing a crypto derivatives exchange.

#1 Location

Before selecting any exchange for cryptocurrency futures trading, confirm that it’s legal and available in your country. In many nations, there’s a regulatory fog surrounding this market. Hence, exchanges cannot operate in these geographies. It makes sense to look at the address of the company for protecting against any fraud.

#2 Fees

Exchanges need to charge fees for crypto trades in order to keep their operations running. These fees vary based on the platform and are usually based on a percentage of each trade. Fees may not be as important to investors as they are to traders. Traders buy and sell more frequently, racking up fees more often, although this relies on the dimensions of every trade versus investment sizing. Some exchanges also have withdrawal fees and limits.

It helps when the crypto exchanges have referral programs in place, helping contribute to a reduction in your trading fees.

#3 KYC/AML

Different exchanges follow different laws and regulations, depending on their locations, offerings, and practices. Usually, they have in place Know Your Customer (KYC) and Anti-Money Laundering (AML) practices, requiring participants to submit information about themselves during account creation. These requirements may vary from exchange to exchange. Some platforms require KYC and AML when an account is created, while some require it when you want to remove limitations or withdraw funds.

#4 Reputation

The cryptocurrency space is still largely a new industry. Hence it is important to be aware of the reputation of each exchange of interest. There are many exchanges that have been involved in illegal activities, hacks, and exit scams, leaving users in dismay. It is essential to be thorough on the reputation of different exchanges. You can search them online, or research them on forms and communities. You could also search for the exchange on various forms of social media to see if any complaints have been posted.

Looking into each platform’s s terms and conditions can also be helpful, keeping your eyes out for anything alarming or out of place.

#5 Security

Each exchange has its own specific methods of security. Always check if the exchange offers two-factor authentication (2FA). If not, then the exchange is probably not acceptable by security today’s standards. Also, research about the type of 2FA which is compatible. Authy, Google authenticator, and Yubikey are platforms where you can search for 2FA, they are the most secure and up-to-date.

Each exchange also has various other security measures, as cold storage asset reserves and custodial storage services. All of these are worth researching.

#6 Volume

Trading platforms vary based on the number of participants using them at any given time, as well as the volumes of each asset being traded. This aspect determines how easily users can enter or exit positions. Hence it is critical.

Volume issues often complicate altcoin positions on certain exchanges, making it difficult to shop for or sell large amounts. If a trader is looking to sell 30 BTC, they may not be able to do so on a low-volume exchange as enough sellers might not exist at the present listed market value, forcing the trader to sell to lower offers on the exchange.

Checking volume is a difficult task sometimes, thanks to exchanges posting fake volumes. One method to correctly know the volume is to check third-party websites that offer this type of data. Coin360, CoinMarketCap and OnChainFX are three options for this. Another way is to look at the order book on different exchanges. Note what amounts of each asset sit in the order book, and how far the price levels are from one another.

#7 Asset selection

While top digital assets like Bitcoin, Ethereum (ETH), and Litecoin (LTC) are widely available on most crypto exchanges, other smaller cap coins and tokens, however, might not be available on certain exchanges. Therefore, often it is important to understand the crypto assets that each exchange offers, selecting the acceptable options.

#8 Derivatives Selection

In addition to hosting many cryptocurrencies, the cryptocurrency derivatives exchange should also have a wide variety of derivatives instruments available for trade. Take Delta Exchange. It offers crypto futures and perpetual swaps, crypto options, crypto interest rate swaps, and much more.

#9 Leverage trading

Leverage allows traders to borrow a certain amount of funds for trades, depending on the amount of funds they hold on the exchange. Derivatives exchanges frequently offer leverage trading. It is important for traders who are about to enter short-term positions with larger sizes. Different platforms may have varying rules regarding liquidation levels and margin calls, but many crypto derivatives exchanges offer anywhere from 1x to 100x leverage.

#10 Prices

Asset prices also vary across multiple exchanges. Owing to participant location, volume, and some other factors, crypto assets usually trade at different prices on different exchanges. Checking these discrepancies can help in choosing an exchange, especially when altcoins are concerned. Price discrepancy can also be a warning that a given exchange may suffer from low liquidity/volume.

#11 Availability of market data

For successful trading, you need easy access to market data and technical details. With an advanced platform, it becomes easy to find the prices displayed across connected venues using consolidated data feed. For example, at Delta, the Research & Analytics portal is a comprehensive section dedicated to cryptocurrency derivatives research and data.

DYOR

Doing your own research (DYOR) is among the foremost important aspects of engagement within the crypto space, not just regarding crypto exchanges, but also the whole process. The above aspects are just good examples of things to think about and research when choosing a crypto exchange, but they will vary from person to person based on their goals, values, and activities. Skepticism and research may prove more valuable than not within the young and developing crypto industry.

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