How to Pick a Cryptocurrency Exchange

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by Brian Sewell, 630 words
Chris Sullivan, a portfolio manager of Hyperion Decimus, which has recently launched a limited partnership hedge fund invested in cryptocurrencies and other assets, explains what he looks for in a cryptocurrency exchange.

Customer Service

Sullivan names high-quality, proactive customer service as the attribute most lacking in typical cryptocurrency exchanges. Ideally, he says, an exchange should focus on efficiency for onboarding, trade execution, confirmation, and problem resolution. He specifically looks for these customer service attributes:

  •     For exchanges facilitating trades over $100,000: Prompt, live phone support during business hours from an actual trade specialist with complete knowledge of the customer account and an understanding of the mechanics of trading;
  • For trades under $100,000, live chat is acceptable, or phone service by a well-informed representative knowledgeable of all exchange policies and the customer account.
  • An exchange providing only email customer service is unacceptable for institutional investors.
  • Wait times of under three minutes for access to all types of customer service.

Variety of Tokens

Sullivan likes to see an exchange offer between five and fifty tokens available to trade. This provides sufficient investment flexibility, and suggests that the exchange has a deep enough knowledge base to offer more than bitcoin.

Versatile Payment Form

An exchange should offer payments for transactions not only in bitcoin (BTC) or ether (ETH), but ideally, also in major fiat currencies, including the US Dollar (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Euro (EUR), Japanese Yen (JPY), and British Pound (GBP).

Market Capitalization and Volume

For consistent liquidity, Sullivan looks for an exchange market capitalization of at least $150 million, and average daily trading volume of $10 million. He recommends checking a list of exchanges ranked by volume per unique visitor published by the Blockchain Transparency Institute. He currently likes the top two exchanges ranked by volume, Binance, with a monthly adjusted volume as of August, 2018 of $1.48 billion, and Bitfinance, with vol

ume of slightly over $500 million.

Investor Best Practices

Sullivan recommends that the moment an investor completes a transaction, the investor should transfer those holdings off the exchange, into either a wallet provided by the exchange, or a wallet provided by a qualified trust or custodian. He distinguishes between either a hot wallet for active traders or a  cold wallet for buy-and-hold investors.

Technical Infrastructure

Exchange Security

Although no exchange can guarantee complete security, Sullivan observes that a robust technology infrastructure can help an exchange work to monitor, detect, and react to hacking threats. He says the following protocols reflect high quality security for an exchange:

o   All personal customer data stored in an off-site, off-line, Tier III data center. That data center is comprised of high-security caged data racks that are SOC I, SOC II, and SSAE 16 type II verified;

o   The exchange should be accessible through a co-location facility.

Insurance

He notes that some exchanges, including Gemini and Coinbase, provide investors insurance in case their cryptocurrency holdings are hacked.

Connectivity – FIX

To increase the efficiency and reliability of online functionality and the quality of price feed (price timeliness), Sullivan says that an exchange should follow The Financial Information eXchange (FIX) protocol. FIX is the standard electronic protocol for quality assurance of pre-trade communications and trade execution for securities transactions. This protocol strives to reduce human error by ensuring that a trade request is communicated, routed, received, and stored in a uniform manner. This ensures transmission quality and reliability, as well as low latency access.

Outlook

Sullivan feels confident about the long-term outlook for cryptocurrency adoption and investment. “The cryptocurrency markets may be down for the year,” he explains, “but I think it’s only a matter of time before new applications boost the appeal of using cryptocurrency as a transaction channel, and regulations create a level of investment certainty that attracts more institutional investors.”

Brian Sewell is Founder of Rockwell Trades (https://www.rockwelltrades.com), an institutional OTC cryptocurrency trading service.

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