Tips and tricks for choosing the right cryptocurrency exchange

Let's see how net worth traders choose the right cryptocurrency exchange. Read on and you will be a professional in finding places that meet safety requirements.

Losing honest capital is more painful than losing gray money. Choosing the right cryptocurrency exchange is necessary in terms of self-protection from dirty capital. The less you mix your funds with unknown money, the less problems you have.

KYC check and how to prepare well

Never send fake documents or IDs of your relatives to the exchange. Because exchanges will notice and deal with such tricks. You can use both local and international passports to pass the KYC check, as well as a driver’s license.

Exchanges have significant resources to cover their fixed assets with dirty coins and illegal paper money. This includes a team of people who will check on new traders to determine that they are not laundering money for criminals.

For those who want to prove that they will not do bad things, cryptocurrency exchanges use several simple methods. For example, employees may ask you to join a short video interview via Skype or Zoom when a representative asks you questions. Not every cryptocurrency exchange has the legal right to conduct such a check, since it depends on jurisdiction.

However, in most cases, you will have a brief conversation with the KYC exchange department in English. If your language is bad, prepare some answers in advance. Please be polite: first they look at how you behave, and only then - at your answers.

The possibility of freezing a deposit

Sometimes the exchange temporarily grabs funds because they suspect the user of illegal activities. If your deposit has been blocked, write to support immediately. They will answer with explanations of what is causing. A possible reason for the ban is that they might want to double-check the results of the AML software analysis.

Companies such as Chainalysis, Crystal Blockchain, QLUE, CipherTrace and others help exchanges determine the relationship between addresses and coins. You may not be involved in some fraudulent transactions, but your donors or employers may have received coins from anywhere. When withdrawing cryptocurrencies, make sure that your coins are obtained from known sources. If the exchange asks where you got the money from, send them a confirmation that you have received payment for legal work, trade (or for any other reason), and this should be enough.

To avoid a headache, check the funds you receive in your personal wallet. Do this before sending coins to exchanges yourself. Use the verification tools available for free. For example, the Ethereum block explorer Etherscan.io allows you to check the reputation of addresses using the built-in scanner.

Moreover, Huobi recently launched Star Atlas, a tool that checks crypto addresses for illegal funds. You can also search for bitcoin addresses with oxt.me, which is a free tool with an extensive data stream.

Exchange cryptocurrency verification by independent auditors

Many exchanges do not conduct external audits. An external audit helps traders understand that the exchange actually stores the funds that it claims to have.

If they lose your money after hacking or because of internal work, you will not be able to return the money. Investors Mt.Gox, QuadrigaCX and BTC-e did not receive any compensation, despite the costly litigation. Years pass and people spend more and more money on legal cases without a fair result. This is what you can accept through the license agreement at registration.

On January 30, 2019, the U.S. cryptocurrency exchange Gemini announced a full audit by Deloitte auditors. They checked the integrity and confidentiality of mechanisms in accordance with the System and Organizational Control (SOC) Type 2:

“SOC 2 exams are specifically designed to account for controls in a service organization related to systems in a service organization used to process user data. ... This included a review of the sharing application, infrastructure and the underlying database of Gemini customers, as well as an institutional-level cryptocurrency storage system that stores the private keys of Gemini online and offline wallets. ”

Before the audit, Gemini was asked by the audit firm BPM to check for support for the Gemini Dollar (GUSD), which is a stablecoin released by the exchange.

As of December 31, 2018, the exchange kept its promise. Gemini dollar bank accounts contain enough GUSD Support Tools. This makes stablecoin safe to use instead of the regular US dollar and some other stable coins.

Here is another case. The Kraken exchange allowed the head of the European Bank of Fidor Edward Stadum to look under the hood of the internal work of the exchange. He was so impressed with the cryptographic record that he left Fidor to join Kraken as the chief legal adviser. Kraken invited users to independently verify the security of their possessions. Here some information about how they conducted an audit called “Proof of Reserves” using cryptography. It is worth noting that after the audit, official reports are not published.

Founders of cryptocurrency exchanges and reputation verification

Before doing business with the exchange, please take some time to make sure that the creators are famous people. They must have a long history of doing business in the banking or crypto industry. Legitimate exchanges will only be aboard people with great roots in finance or IT. Surprisingly, many exchanges are still managed by anonymous people or fraud-related individuals.

Enter the names of the founders in the Google search field and add “fraud”, “financial fraud” or “investigation”. Also check out some Telegram crypto channels specializing in crypto industry scams. Many of these channels store unofficial information about exchanges and their founders. The mainstream media will not publish this information until official documents and major publications in the press confirm the allegations. Unofficial sources are useful for due diligence and OSINT efforts, but should be taken with caution.

Please look for information about the domain name of the exchange. Is the domain registered in 2018-2020? Maybe it has low traffic on Similarweb, Alexa, Google? After you gain more experience, go to lesser known exchanges (if necessary).

Please note that registration in Estonia may be a red flag. Any cryptographic company registered in Estonia may have hidden operations. The Estonian government canceled more than 500 crypto licenses in June 2020. Too many fraudsters have used official EU registration to trick investors (and launder money). Per Andre Nomm from the Estonian Financial Supervisory Authority (EFSA):

"[Estonia] probably issued these permissions too easily."

They are reviewing their licenses to make registration more difficult. This is a measure recommended by major EU regulators a long time ago.

Volumes of trade: how to recognize washing and fake statistics

The Tie analytics found that some exchanges can fake up to 90% of their trading volume. Data were collected by calculating the expected volume per trader in relation to the total trading volume reported by the exchanges:

“If each exchange averaged the volume of visits to CoinbasePro, Gemini, Poloniex, Binance and Kraken, we would expect that the real trading volume among the top 100 exchanges would be $ 2,1 billion per day. This figure is currently $ 15,9 billion. ”

Analysts at the Blockchain Transparency Institute (BTI) and Bitwise have come to similar conclusions. However, CoinMarketCap CTO Maurice Ledford did not agree with Bitwise regarding their findings. During an exclusive interview with Coinspeaker, he calls washing research “an incredibly slippery slope.”

Regardless of whether the researchers provide accurate data or not, try using exchanges that pose less risk.

How to distinguish real feedback from fake feedback from competitors

There are many sites where you can see the reviews of traders and even exchange workers. These include Reddit, Bitcointalk, Twitter, Glassdoor, TrustPilot and others. Please note that some of these sites allow anyone to post comments on any company’s profile. Thus, competing exchanges can simply imitate negative sentiment in order to gain market share.

However, in the case of the Reddit and Bitcointalk streams, there is a clear need to respond to the allegations. People usually write under nicknames with a rich history of publications. It’s hard to maintain an army of bots so no one will notice.

So exchange officials and even CEOs post answers to negative comments on Reddit, Twitter and Bitcointalk. Typically, traders are unhappy that the exchange froze their request to withdraw funds for compliance reasons. For example, here comment with the claim that Kraken forces the user to buy cryptography and withdraw their balance of $ 312 within 000 hours.

Kraken CEO Jesse Powell replied to the topic, and if you look at the details, the exchange helped the user save his money. Since this was not an exchange problem, the bank simply refused to process transactions for this person.

But sometimes exchanges ignore such topics, which may indicate that they will not listen to you in case of problems. Look carefully at any answers from the exchange staff. Was this helpful? Has the user received his funds back? Exchanges are not government agencies, they do not have the right to block user accounts for months. Even if the user has sent the so-called damaged coins to the exchange, he must return the money within a few days.

Unfortunately, some exchanges and coin exchange services confiscate cryptocurrencies and do not return them even after the trader provides confirmation of legality. Only after he creates a ton of complaints on crypto-forums, employees can appear to answer and return the money. Please note that legitimate critics typically publish the application number or transaction identifiers in the claim.

Risk hedging: stablecoins made by exchanges

Many exchanges create stablecoins to compete with Tether (USDT). Tether is the first stablecoin in the history of cryptocurrency. It is widely used by exchanges and other companies, but has certain support issues. Tether is backed by the Bifinex exchange and currently has over 9,2 billion in circulation.

Stablecoins are a convenient way to accumulate wealth in times of extreme Bitcoin volatility. Pegged to fiat money, they help reduce portfolio volatility. Exchanges use Tether to transfer money without losing price or speed. When it comes to the security of a stablecoin, the exchange must confirm that the coin is fully supported. However, not everyone does this.

You should check to see if there are any stablecoin support messages online. In general, try to avoid major stable coins such as Tether. Because there are certain concerns about support mechanisms and coinage.

Other things to consider when choosing cryptocurrency exchanges

Always check that the cryptocurrency exchange is not involved in coin theft after a fork. The most famous examples are Ethereum Classic (ETC), Bitcoin Cash (BCH) and Bitcoin SV (BSV). Since these projects are the result of a split in the blockchain, the only way to get new coins is to have the original private keys. Exchanges, OTC tables, other custodians that control keys on your behalf may refuse to distribute coins after a fork, citing maximalist ideology or for any other reason.

Even though some people may hate new coins, it's still money. It is highly recommended that you remove coins from the cryptocurrency exchange if you read news about the upcoming fork of the blockchain. After splitting, you can send the original coins back to the exchange, leaving fork coins for yourself.