11 Factors to consider while choosing a Bitcoin Derivative Exchange

“Economists and journalists often get caught up in this question: Why does Bitcoin have value? And the answer is very easy. Because it is useful and scarce.” — Erik Voorhees, Founder and CEO of ShapeShift Ag.

Bitcoin is one of the prized possessed elements in the world of cryptocurrency. People without any knowledge of cryptocurrency would yet have surely heard of Bitcoin.

A Bitcoin Derivative Exchange can be defined as financial security that is derived or obtained from an underlying asset or assets. It is a contract amongst two or more parties and is relied on the fluctuation of prices from the asset. Selecting a wrong platform for bitcoin derivative exchange could lead to a road of mishaps. So it is very essential to acknowledge if the investing exchange is long-term or just to trade? It thus becomes important that you choose Bitcoin Derivative Exchange precisely.

Also Read, 5 things you should know before Crypto trading

Here are a few factors you could consider while choosing a Bitcoin Derivative Exchange:

  1. Reputation: It is one of the additional but a relevant factor to know the reputation of the exchange one is interested in. It has been called for that various exchanges has been a part of criminal activities that lead the user in an unsuitable place. Hence it is very important to research and learn about the exchange on various media platforms. The period of the exchange’s existence, its position in the market, the regulatory-related framework are few of the important factors to consider while choosing bitcoin derivative exchange.

2. Security: Security is one of the fundamental factors of any aspect.

  • KYC / AML: The law, regulations and practices will be different as per the location and the exchange. Know Your Customer (KYC) and Anti-Money Laundering (AML) either or together are practised by various countries. It is required mostly at the initial stage of the process of account creation also cryptocurrency exchange has ban certain country’s customers.
  • Link: The exchange should preferably start with “https” instead of just “Http”.
  • 2FA: A two-factor authentication is ideal for the present standards of the security. Google authenticator, Yubikey and Authy are the 3 known approaches.
  • Custodial storage services and Cold storage asset reserves are also the other security measures.
  • Auditing the program and notified with an email or SMS during exchange to the customer will provide additional security facility.
  • Transparency: Is the exchange being transparent enough to put it all out there. A transparent exchange will reveal its company’s basic details such as the owner’s name, members of its team, the address of its headquarters and so on.

3. Limits: Some exchanges have limitations such as withdrawal or purchasing. Thus one should know the amount an exchange supports. However, there are OTC markets available for purchasing large amounts.

4. Liquidity: Generally liquidity of exchange is more when the volume of trading is high. It helps to complete the transaction process faster, accessible and avoiding the price volatility. A “locked-in” pricing offered by exchange assures the price of the time of transaction. However, liquidity varies for different reading pairs.

5. Volume: Trading platform can be a complete roller coaster ride as it depends on the number of participants utilizing in the time also the asset’s amount that is traded. The following concept hence impacts the users and affects the enter or exit positions. The volume factor often complexes the position of the altcoins on exchanges leading it to difficulty in selling or purchasing large asset’s amount. Checking the volume of the exchange could be pretty difficult hence various 3rd party websites offer the related data.

6. Insurance Fund: An insurance fund of an exchange can prove to be beneficial for the users during crisis as it can enable fund as compensation during certain circumstances. Most of the exchanges are covered under Federal Deposit Insurance Corporation that protects a certain amount of funds of U.S. users.

7. Fiat Exchange: At some point, the traders and investors would need to transfer the crypto in their interest of currency. Hence a fiat compatible with exchange would be required for transferring currencies into crypto and from crypto to cash out the profits. It is also important to check the bank’s compatibility with the fiat and exchanges for trade.

8. Leverage Trading: Bitcoin Derivatives Exchange also offers leverage trading as it enables traders to borrow a certain amount of funds and based on it the exchange is held. Traders looking for larger size in short-term positions are in for a call also many exchanges offer 1x to 100x leverage however regulations would be different for varied platforms. Hence the bitcoin derivative exchange with high leverage in consideration is beneficial.

9. Fees: Traders are more concerned about the fees than the investors as traders buy and sell more frequently. Majorly exchanges has a small fee for trade however it is affected by the platform it’s based on and the percentage of every trade. It also differs as few exchanges has withdrawal fees and limits.

10. Other Factors:

  • Factors like price chart, technical analysis tool, order book and algorithmic trading tools are one of the key features to include before participating in the trading platform.
  • Community forums like Bitcoin Reddit and Bitcoin Forum will help you to understand about the exchanges and its position and value clearly.

11. Instances:

  • A bitcoin derivative exchange platform accepts users from almost all countries, however, these are the major ones- UK, EU, Canada and Australia.
  • Some of the known Bitcoin derivative exchanges are- Binance, Bitfinex, Coinbase, Kraken, Bitstamp and so forth.

A bitcoin derivative exchange is pretty different than the others and so can be appealing to many. However, one needs to research, study, analyze, learn and understand the exchange wisely before considering to choose a platform as it does differ from individual-to-individual based on their aim and activities.