Cryptocurrency trading was a novel concept in 2009 when the first digital currencies hit the market. However, it is emerging as an asset class among alternative investments like hedge funds, ideal for long-term investments.
According to one survey, 16% of Americans had invested in cryptocurrency by November 2021, and the percentage keeps rising. Moreover, cryptocurrency is also emerging as a popular payment method, acceptable in some major retail outlets and online platforms.
The surge in cryptocurrency popularity has increased the establishment of crypto exchange platforms for trading crypto coins. Below is what you need to know before onboarding to such platforms.
Different Cryptocurrency Platforms Have Different Operational Structures
The ever-rising demand for crypto coins as an investment option has led to the mushrooming of cryptocurrency exchange platforms within and outside the US. The best crypto wallets allow novices and professional-level crypto experts to trade different crypto coins by buying, selling, or swapping one type of coin for another.
However, the challenge is that different crypto exchange platforms have unique operational structures and offer significantly different trading experiences. For instance, reputable platforms like Swyftx Crypto Exchange are centralized platforms, utilizing a different model from decentralized platforms.
Centralized crypto exchanges feature a single entity or third party that oversees a network of transactions. Therefore, the entity manages user transactions on the platform, maintains all transaction ledgers within the network, safeguards trader holdings or digital wallets, and protects user data.
The primary advantage of centralized crypto exchanges is that they make it easy to find trading partners among the network of users, providing a seamless trading experience. Also, they allow trading fiat or government-issued currency with crypto coins and vice versa.
On the other hand, decentralized cryptocurrency exchange platforms have no third-party intermediary and feature a network built solely on peer-to-peer exchanges. Traders on such networks utilize atomic swaps, meaning token owners have complete control of the trading process.
Second, some crypto exchange sites structure their platforms to suit specific trader expertise. Such specialized platforms may cater exclusively to novice or expert traders. Consequently, they have trader education resources designed to meet target customer needs.
Therefore, consider establishing trading goals before choosing an exchange platform to choose one that meets your needs. Cryptocurrency trading goals include short-term gains, long-term gains, portfolio diversification, and specified risk levels.
Varying Restrictions And Regulations Across Different Jurisdictions
Cryptocurrency coins are not fiat, meaning cryptocurrency exchange platforms operate independently from government financial institutions or federal authorities. However, different countries, regions, and territories have varying rules regarding whether cryptocurrency exchanges operate within their jurisdictions.
For instance, countries like China, Indonesia, and Bolivia either restrict or ban the trading and holding of digital currencies. However, crypto trading is legal in the US, as stipulated under the Bank Secrecy Act.
Under the Bank Secrecy Act, any institution dealing in digital currency must collect data information and share that information with the Financial Crimes Enforcement Unit (FinCEN) to counter financial crimes. Moreover, the regulatory Act stipulates that all virtual currency administrators and exchangers (like centralized crypto platforms) register with FinCEN and generate specified compliance plans.
Some cryptocurrency exchange platforms are banned and inaccessible to US citizens after failing to comply with the regulations above. Moreover, some crypto exchange platforms are unavailable in select states like Hawaii. Therefore, ensure the platform you choose complies with available regulations and is operational within your jurisdiction.
Trading Fees
Trading commissions or fees are the primary income stream for cryptocurrency exchange platforms. Different platforms employ different fee-charging strategies to balance profits and user experience.
Crypto trading platforms typically use the taker-maker model, whereby market makers earn a commission from transaction fees from customers who purchase coins. However, the fee rates vary dramatically for different coins on different platforms. Moreover, some platforms also charge minimum deposit purchase fees alongside taker and maker fees.
Besides transaction fees, you may also have to pay credit card/cash advance fees, debit card fees, and deposit and withdrawal fees for coin and fiat wallet transfers. However, some platforms offer eligible traders discounts and waivers on transaction fees.
Tax Filing Convenience Varies
The IRS classifies digital currency, including crypto-coins, as property for federal taxation. Therefore, you must file taxes on transactions, including crypto mining and capital and income gains from the trading process.
Some centralized crypto trading platforms send qualifying traders within their network from 1099-K, a tax form for remitting non-employment-related income. The form reports gross profits for qualifying customers who accrued a specified income amount for the last year.
Moreover, some have blockchain-based apps that monitor transactions helping consumers track gains and losses essential when filing taxes. Therefore, consider choosing a platform that makes filing taxes effortless.
Liquidity Volume
Different cryptocurrency trading platforms vary in average liquidity; higher liquidity means a more stable market with less volatility for traders. Therefore, onboarding onto a platform with high average liquidity means less risk of loss for your investment.
Conclusion:
Cryptocurrency trading has evolved from a niche activity into a viable wealth and income generation tool. However, preliminary knowledge is vital in navigating the expansive crypto arena and informing your trading plan. Thankfully, you now know where to start on your crypto journey and how to meet your crypto exchange goals.
