In the words of our country’s Founding Fathers, all [people] are created equal. But, in the world of fiat and monies, not all currencies are valued equally.
Influenced by market inflation, debt, interest rates, trading agreements, and of course, political stability, the balance between any two currencies is in a state of constant fluctuation, directly impacting its exchange rate. An “exchange rate” is the price of a nation’s currency in terms of another currency. For purposes of this article, they are quoted in values against the U.S. dollar (USD).
The Gateway To The Crypto World
There are two types of currency exchange rates—the spot exchange rate, or interbank rate, and the nominal exchange rate. From a consumer and traveler’s perspective, we often refer to the latter. The way in which we read and define an exchange rate is similar to how we measure cryptocurrency values against our own currency.
Lesson #1: Why Are You Entering Into This World?
For the novice, diving into crypto can be both exciting and overwhelming. Not only is there a need to decode the complexities of the technologies behind the currencies, but also a need in recognizing the difficulties associated with investing, trading, and monitoring them.
But, if you are entering the crypto world for the first time, there is one thing that is certain—you must understand how to trade and purchase. Why? Not all coins are able to be purchased through fiat. Thus, you have to resort to using cryptocurrency exchanges.
If you are getting into the space to make a quick buck, you better know how to earn that quick buck. If, on the other hand, you are in it for a long-term gain (and most likely some loss), you need to understand how the market works, especially as it pertains to exchanges.
Lesson #2: What Are Crypto Exchanges?
With over 1,600 cryptocurrencies in existence, there are only a select few exchanges available, allowing holders to convert their fiat or paper currency into the crypto-base currency (“base currency”) they desire (Bitcoin, Ether, or Litecoin). Consequently, some coins can only be purchased by using these bases, and cannot be bought using a domestic currency, such as the USD.
It is for this reason that these three currencies (BTC, ETC, and LTC) are considered to be the “gateway” to the crypto world, and are identified as base currencies for cryptos.
In its most basic definition, cryptocurrency exchanges allow an individual to do three things:
- To exchange one cryptocurrency for another cryptocurrency;
- To purchase and sell a particular crypto coin(s); and/or
- To exchange and convert your fiat into another cryptocurrency.
Types of Cryptocurrency Exchanges
Before choosing an exchange, it is important to look at what it offers. There are three main cryptocurrency exchanges to be aware of:
#1 –Centralized Cryptocurrency Exchanges (“CEX”)
Similar to a traditional stock exchange, a centralized cryptocurrency exchange, or CEX, operates as the middle-man as between two parties. A “centralized” system means that one party is trusting another with some type of information, in this case, handling their money.
The exchange, upon receiving a user’s money, holds onto it as a bank normally would. As an investor monitors market prices of available crypto on a particular exchange, he or she may want to trade their fiat for another crypto (trading pair), and eventually place an order.
At this point, the exchange will find a seller(s) to match the buy, if they are selling, eventually, finding a buyer and completing the exchange. When the world of crypto exploded last year, platforms such as Coinbase, Robinhood, Kraken, and Gemini became extremely popular because it made it easy for fiat/crypto pairings.
There are also exchanges out there that only provide crypto to crypto pairings–purchasing or acquiring one crypto, by trading in another crypto. Examples include the popular Binance, Huobo, and Bitfinex.
But, more about trading pairs later on.
Maintaining Your Security
Since 2011, there have been over 60 cyberattacks aimed at cryptocurrency exchanges and other digital currency platforms. Renowned attacks including Mt. Gox (Japan, 2014), Bitfinex (Hong Kong, 2016), Coincheck (Japan, 2018), Coinrail (South Korea, 2018), and Bithumb (South Korea, 2018) continue to present a high potential for system crashes. But, what did each of these attacks have in common? The attacks were all targeted towards CEXs, attracting the attention of black hat hackers galore.
Taking into consideration the security vulnerabilities these centralized systems contain, the idea of decentralized projects and ventures has exploded with two goals in mind–maintaining security and removing intermediaries so as to provide for efficient, direct transactions.
On-Boarding the Novice
Looking at such a cyberattack such as Hong Kong’s Bitfinex exchange, I decided to take a look and see how the Hong Kong (HK) market is responding to the space since I last traveled there. One company, Coinsuper, recognizes the seriousness of maintaining strong internal security, operating in the heart of central HK.
Functioning as a “fiat to crypto” exchange, the platform allows for deposit and withdrawal in addition to BTC, ETC, LTC, and other popular token offerings. It has been consistently listed in the top fifteen exchanges by daily volume, globally, according to CoinMarketCap data.
With less than 2% of the Hong Kong population involved in the crypto space, I learned that there aren’t too many major “fiat to crypto” exchanges based in the Hong Kong/APAC region. Coinsuper aims to be the “on-ramp” for those individuals looking to on-board the space.
“As an exchange, in order to successfully utilize “fiat to crypto” conversions, you have to be prepared for regulatory scrutiny,” said Kenny Shih, Executive Director of Coinsuper.
“We pride ourselves on having this level of self-compliance within our framework; our head of the anti-money laundering (AML) division was also the former head of AML at HSBC Private Banking.”
But, the company’s team is worth bragging about. Its CEO, Karen Chen, is the former president of UBS (China) Ltd. and its COO, Dr. Anthony Ng, a former Managing Director of CITIC Futures International, Morgan Stanley, and JP Morgan.
When I asked Shih about the frequency of regulatory communication, he told me that they are in constant communication with both Hong Kong and Chinese regulators. “We want to be considered the model exchange out here, and thus, we are doing everything we can to follow the rules.”
While self-funded, they have since entered into strategic equity partnerships with ventures such as Pantera Capital and 8 Decimal Group. In its 7-month life span, the exchange currently offers over 50 tokens and is heavily focused on the “know your customer” (KYC) approach, providing 24/7 customer service. It previously hosted a successful initial public sale for the Metadium project, helping it to raise over 5,900 ETH over a period of five days.
Shih also told me that for young millennial investors, it’s important for them to embrace the online space as we all enter into what some call the “Web 3.0” phase of the net.
#2 –Decentralized Cryptocurrency Exchanges (“DEX”)
The introduction of blockchain technology and cryptocurrencies into our markets is the result of society expressing its view that transactions should be decentralized, or more closely connected to the transacting parties, without the need for intermediaries.
Decentralized crypto exchanges, or DEXs, are created for the sole purpose of removing the middle man to any transaction. It is a marketplace where buyers and sellers come together and engage in transactions directly.
These peer-to-peer (P2P) systems such as Stellar DEX and Waves DEX, are much harder to exploit and/or hack. From what we’ve seen, more often than not, it’s the user who inadvertently locks themselves out of their account.
While these seem to be a much better alternative to CEXs, popularity is still weaning. The reasoning behind this is the lack of commodity and overall user support, which would help to attract a mainstream user base. Until this happens, DEXs will continue to offer low volume and low liquidity. Personally, I would like to see this continue to gain popularity.
Lastly, the hybrid crypto exchanges are designed to combine the benefits from both CEXs and DEXs. The focus on this is to provide privacy and security of a DEX. While the first hybrid exchange, Qurrex, was launched earlier this year, the space is still looking to tighten functionality up with both systems.
Lesson #3: Finding A Local Crypto Exchange That Accepts Your Domestic Currency
The number of available exchanges that accept fiat currency are limited in the number of coins readily available for purchase.
That is why a platform like Coinbase has become one of the most popular exchanges in the world, allowing investors to purchase Bitcoin, Bitcoin Cash, Litecoin, and Ethereum—all with their fiat. Other examples include Robinhood, Gemini, and Kraken.
Keeping in mind the limited options most local exchanges provide, investors instead, look to purchase a base currency (BTC, LTC, ETH) in order to then purchase other crypto, or altcoins.
Lesson #4: Going From One Crypto To Another
Since a user cannot purchase altcoins directly from an exchange that accepts fiat, more likely than not, the user will not be able to determine the value of the altcoin based off their domestic currency.
The term “trading pairs” describes a trade between one type of crypto and another. For example, if you were to look at the trading pair ETH/BTC, you’re looking at the potential to either buy or sell one for the other. A user can either buy Ethereum with Bitcoin, or sell Ethereum for Bitcoin, or vice-versa.
When trading crypto for crypto, it is extremely important to understand how these trading pairs work.
While not an economics lesson, be mindful of the potential tax implications associated whenever you convert one crypto to another crypto, or convert cash into crypto. Understanding why you are choosing to utilize one trading pair over another could be the difference between gaining and losing everything. Literally.
Lesson #5: Regulation
When utilizing exchanges, take note of where the platform is licensed to exchange in money transmission. For example, Coinbase, is licensed to engage in money transmissions in most U.S. jurisdictions. Additionally, it is registered as a “money services” business with FinCen. This is worth mentioning because late last year, the IRS entered into an agreement with Coinbase to share user account information with it.
The level of regulation differs with each exchange, so users should conduct their own due diligence when determining which platform may be best suited for their transacting needs.
We have already seen platforms like Binance and Kraken finding its way into the New York Attorney General’s Office for potential regulation violations. Back in February, U.S. Commodity Futures Trading Commission (CFTC) Commissioner, Brian Quintenz, expressed favor towards operators adopting self-regulatory standards to help police the space.
“I think a self-regulatory organization, or SRO, for cryptocurrency exchanges could spur the development of standards around cybersecurity policies, data retention, protection of customer accounts, trading practices and other issues.”
At the end of the day, it is still extremely important to take appropriate safeguards to ensure your wallet, key, and any other associated information are stored in a safe place. Additionally, be mindful of where you are going to purchase and/or sell crypto.
This space is a playground for black hatters looking to take you for a run for your money, so be smart and educate yourself first.