A crypto trading platforms can have hundreds of supported assets, millions of users, and impressive daily trading figures. But those numbers alone do not tell you whether it is a good environment for executing trades.
Some of the most important information for crypto traders can be discovered under the surface.
What proportion of trading is taking place? What is the order mark level? What would be your trade’s contribution to the price? What assets does the platform have? How clear is it about those holdings?
The three concepts that form the core of crypto market infrastructure are the ones that come up with these questions. Being able to distinguish between them will enable traders to see past the rankings, the features that are being touted, and to better understand what is actually happening when they make a trade.
Volume Tells You How Active a Market Is
Trading volume is the volume of trading that occurs within a specific time period, typically one day.
At first glance, volume seems straightforward. A platform with significant trading activity may appear more attractive because there are many participants buying and selling assets.
However, volume is not the only consideration.
A crypto exchange could trade in significant volumes, but specific trading pairs may trade with lower volume. Larger tokens can draw significantly greater trading volume than smaller tokens, such as Bitcoin and Ethereum markets.
This does not simply mean traders ought to merely inquire about the volume that this exchange has. Perhaps a better question is:
What is the size of the market that I want to trade? This is especially critical for the less liquid cryptos. When it comes to trading, liquidity is the answer to how easily you can trade.
Liquidity Determines How Easily You Can Trade
A liquid market is one where there is sufficient interest in buying and selling to absorb orders, which do not result in significant changes in price. A thin market, on the other hand, will see volatility react to a relatively large order.
Some of the important factors that allow traders to know the liquidity are the bid-ask spread, order book quantity, and possible slippage.
Suppose the price of bitcoin is $100,000 and there are plenty of buy and sell orders around that price in the order book. Suppose that bitcoin is trading at $100,000 and there are many buy and sell orders near that price in the order book. A large volume order by a trader may be able to be placed without causing any significant impact to the market.
Now suppose there’s a small token with a finite number of orders around the current price. The price may end up significantly lower or higher if the order is of similar size.
The answer to that difference is liquidity.
The Difference Between Volume and Liquidity Matters
A common mistake that many new crypto traders make is confusing volume and liquidity.
They are not.
Volume is a barometer of trading activity. Liquidity is a term that refers to the ability of the market to absorb trading activity.
The volume may be high on a platform but only have a few pairs available to trade. On the other hand, there can be a market that is decently deep, but does not provide massive trading volumes every day.
That is why traders should look at more than just an exchange’s headlines volume.
Look at:
- Bid-ask spreads
- Order-book depth
- Trade activity on the pair in question
- Expected slippage
- The volume of orders at a price close to the market price
Why Slippage Can Change the Cost of a Trade
Slippage is also an occurrence that happens when the price at which a trade is executed isn’t the one that the trader expects.
It is especially important when markets are thin or when the orders are substantial.
Assume a trader has decided to buy a large number of a token for $2.00. If there are not enough sellers at $2.00, the order may continue filling at $2.01, $2.03, $2.05, or higher.
The trader can accept the deal, but the mean price of the deal might turn out to be substantially different from the first offer. This is one good reason why liquidity is important even if the trading fees of a platform may seem low.
A low trading fee may not translate into a low-cost trade if the liquidity in the market is lacking, causing a significant amount of slippage.
Reserves Tell a Different Story
Reserves tend to be more about holding assets, whereas volume and liquidity are more about trading activity.
Centralized trading platforms have made it more and more common for users to place assets in reserves, which has led to an increased focus on what happens to these assets when they are placed in reserves.
An exchange could display information related to cryptocurrency in its wallets or create a report known as a proof-of-reserves to demonstrate particular on-chain holdings. This can provide some clarity to the user.
But take note that the information needs to be interpreted carefully when it comes to reserves.
Having control over some cryptocurrency does not necessarily mean that this exchange has a full picture of its finances. Users must also know what liabilities are included, how they were verified, and whether the disclosure includes all relevant customer liabilities.
Key Factors to Consider When Choosing a Crypto Trading Platform
However, the platform depends on the trader that they are, location, assets they trade, and the style they use. However, there are a number of features that need to be looked at prior to opening a new account.
Security
Examine account security, two-factor authentication, asset custody, limits on withdrawals, and how the platform safeguards customer assets.
Liquidity
Do not use the total volume of the platform to assess the liquidity of the markets you want to trade; instead, you should check the liquidity of the markets themselves you would like to pick.
Fees
Check out maker/taker fees, withdrawal fees, spreads, and additional charges. The quoted trading cost is just one of the total costs.
Asset Selection
It’s great if there are many supported cryptocurrencies, but if markets in the cryptocurrencies you do need are not liquid, then that becomes a problem.
Storage
Know if the platform is custodial and how to move assets to an outside wallet. Hot wallets are online wallets, whereas cold wallets are offline wallets.
Transparency
Seek transparency on the platform’s structure, fees, withdrawal limits, and reserves.
The provided research on crypto trading platforms also mentions security, liquidity, fees, storage solutions, and payment methods as significant considerations for assessing an exchange.
What Should You Look for in a Crypto Trading Platform?
- Kraken is cited as the reviewer’s selection for security, trading tools, asset selection, pricing, and breadth of products.
- Coinbase is particularly noted for its ease of use and educational materials, making it a good choice for newcomers to the crypto market. The review stands out for its security emphasis and advanced ActiveTrader platform, which is particularly useful for experienced traders, and its compliance focus, as well as its custody infrastructure.
- Crypto.com is touted as a mobile-friendly and Bitcoin-focused company, offering a wide range of products for mobile.
- Binance is highlighted for low fees, with the review pointing to competitive trading costs, deep liquidity, and a broad selection of trading products.
Final Thoughts
The decision of which crypto trading platform to use is all about the underlying infrastructure of the trading platform.
The number displayed next to an exchange’s daily volume is only one piece of the puzzle. Liquidity determines how efficiently orders can move through the market, while reserve disclosures can provide insight into the assets held by centralized platforms.
The strongest evaluation therefore goes beyond asking which exchange has the most users, the lowest fees, or the largest selection of tokens.
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