Cryptocurrency exchanges can vary wildly in usability, security and fees. As an investor, finding the right exchange is essential to saving time and money.
- What is a Cryptocurrency Exchange?
- What Makes Kraken Unique?
- Why Kraken Might Not be Right for You
- What to Look for in a Cryptocurrency Exchange
- The Best Alternatives to Kraken
- Is Switching Exchanges Worth It?
What is a Cryptocurrency Exchange?
A cryptocurrency exchange allows its users to buy and sell various cryptocurrency assets. Some exchanges also offer other features, like price discovery and measures of trading volumes. Additionally, some exchanges allow investors to store their cryptocurrency assets on the exchange instead of in a wallet.
Cryptocurrency exchanges facilitate the trading of cryptocurrencies at market prices. Some cryptocurrency exchanges deal solely in trading cryptocurrencies for other cryptocurrencies, while others allow for fiat currencies to be traded for cryptocurrencies. Cryptocurrency exchanges can be either centralized or decentralized.
Centralized cryptocurrency exchanges are overseen by an exchange operator, the third party that runs the exchange. These exchanges make it easy to sign up, offering convenient features that let you buy cryptocurrencies with credit or debit cards. Some even allow for investors to link their bank accounts to the exchange to ease the process of buying cryptocurrencies. Many also offer rewards programs and educational resources. This usability and convenience typically comes with a tradeoff: fees that are paid to the exchange operator.
Major exchanges that operate as businesses are typically regulated, but regulation can vary wildly based on location. Most major exchanges have been audited, in which an independent party verifies that the amount of cryptocurrency the exchange operator holds matches the value of all the cryptocurrency in its user’s accounts.
Regarding security, exchanges have been breached by hackers in the past, and ultimately any cryptocurrency that is not secured properly in a wallet can potentially be stolen. An old adage reads “not your keys, not your crypto” and leaving cryptocurrency in an exchange can put it at risk.
Decentralized cryptocurrency exchanges are built to preserve the original intention of cryptocurrency: that currency should be free to move without interference from third parties or institutions. Decentralized exchanges (DeXs) are open source and depend on peer-to-peer trading. These DeXs are typically more difficult to use than a centralized exchange, but give users more control of their cryptocurrency.
What Makes Kraken Unique?
The platform allows many transactions such as: buying, selling, exchanging, futures, margin trading and market orders. Many of these transactions require a lot of involvement from the Kraken platform itself so its security is a critical part of its platform.
Kraken puts a lot of effort into providing top notch security for its users. All Kraken accounts offer 2-factor authentication (2FA), which means that a login attempt needs to be approved on an additional device other than the device making the login attempt. Kraken follows the U.S. Know Your Customer (KYC) standards, which require the personal information of a customer before registering to trade assets. The exchange holds 95% of its cryptocurrency deposits in physically protected and geographically distributed cold storage wallets which have never experienced a security breach since Kraken started in 2013.
In fact, Kraken was founded as an alternative to another exchange that had suffered two security breaches, so security has been at the forefront of Kraken’s design from the very beginning. They undergo regular penetration testing, and have a bug reward system to incentive reporting potential exploits before they become a problem. Kraken also undergoes proof-of-reserves audits by a third party to ensure that it has all of the cryptocurrency needed if every single investor was to withdraw all their cryptocurrency at once.
Why Kraken Might Not be Right for You
Kraken’s heavily involved security measures come at a hefty price that can be unreasonable for many of its users. Kraken is supported in 48 states, excluding Washington and New York, and is recognized as a bank charter under federal and state law. The notable exclusion of the 4th most populous state leaves millions of users looking for an alternative.
Kraken only supports around 70 currencies, which isn't much compared to some competing exchanges. Some of the popular currencies that aren't supported on Kraken are Ripple (XRP), Graph (GRT), SushiSwap (SUSHI) and 0x (ZRX). Kraken generally offers fewer features to its U.S. based users. Most notably, Kraken’s mobile application isn’t available in the U.S.
Common Complaint: Security Features Compromise Ease of Use
Signing up to use Kraken requires much more time and effort than several of its competitors, which can be a hassle for entry-level investors who aren’t looking to trade huge amounts of cryptocurrency, or those who just want an easy introduction to the cryptocurrency space.
Common Complaint: Transaction Fees
Depending on the digital asset you choose to purchase, you'll be paying anywhere from 0.9% to around 1.5% fees to make your purchase. While this is comparable to cryptocurrency exchanges like Coinbase, there are certainly less expensive options on the market. For some, paying higher transaction fees is worth the convenience and accessibility of crypto apps like Kraken.
What to Look for in a Cryptocurrency Exchange
When choosing a cryptocurrency exchange, investors should consider a wide variety of factors.
Security is paramount, investors should be looking for exchanges that have a great track record regarding prior hacks. Bug-fixing rewards for finding exploits are a nice plus that helps ensure the exchange can’t be compromised. Some exchanges in the U.S. have FDIC insurance on any USD stored on the exchange, further safeguarding your assets. Additionally, putting reserves in cold (offline) storage greatly reduces the risk of a breach. Two-factor authentication is a must as hackers and scammers run rampant in the cryptocurrency space.
The number of listed coins is another factor you should consider when choosing an exchange. If you’re looking for a specific coin to trade, you should check what exchanges offer it. Additionally, consider how many total coins can be traded to ensure you have as many options as possible. Most major exchanges support almost all of the top coins, so you should be looking for notable exclusions, not inclusions.
Customer service is key to resolving errors with your account. Should the worst happen, such as an account breach or a trading error, good support services can be the difference that saves your crypto. Some exchanges have notoriously poor customer service and should be avoided.
Wallet integration makes it possible to move cryptocurrency on and off of the exchange, so you should consider how much to move and send cryptocurrency off the exchange.
The Best Alternatives to Kraken
Take a look at the best crypto exchanges to use in lieu of Kraken.
Coinbase offers easy integration with PayPal, and an incredibly user-friendly experience. Coinbase focuses on U.S. customers, whereas Kraken actually restricts U.S. users more than their other customers. Coinbase has a well-regarded mobile application that’s available in the U.S., a key difference from Kraken, which doesn’t offer their mobile application to U.S. customers.
Coinbase has a shorter setup time than Kraken, which attracts new investors. Most notably, Coinbase offers FDIC insurance on the USD balance of its users — all USD on the exchange is insured similarly to a bank balance.
Coinbase has higher fees than Kraken. In fact, Coinbase has some of the highest fees in the industry. Coinbase has a lower total trading amount than Kraken, making it a poor choice for investors who intend to invest very large sums of money.
Binance offers a slightly lower fee structure than Kraken, and offers a much larger selection of coins than any other exchange.
Despite these perks, Binance severely limits U.S. users and is facing a threat of severe regulatory action. Binance suffered a major hack in 2019, and is not very transparent with its security features. Binance has also been known to have poor customer service.
eToro allows for the trading of the most popular cryptocurrencies and allows investors to mimic the trades of other notable investors with well-established return rates.
Fees can be significant on eToro, and the service doesn’t offer cryptocurrency to cryptocurrency pairs like many of its competitors. Minimum transaction amounts are higher than competitors.
Gemini features low fees that are similar to Kraken. Gemini offers FDIC backing on USD balances, something that Kraken does not offer.
Gemini offers fewer coins than Kraken, and it doesn’t allow for credit/debit cards to be used to buy crypto.
Is Switching Exchanges Worth It?
Kraken is undoubtedly among the best cryptocurrency exchanges on the market right now. If you currently use Kraken, there are few reasons to switch to a competitor, unless you are looking to buy a specific coin that Kraken has not listed.
However, many traders open several exchange accounts to maximize their trading possibilities, and there’s no downside to using more exchanges to reach more types of coins.
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