cryptocurrency

Cryptocurrency Exchange Rating Methodology – Investopedia


If you’d like to trade or invest in cryptocurrency, opening an account with a crypto exchange is a simple way to get started. Cryptocurrency exchanges are platforms that allow you to buy, sell, and trade cryptocurrency. But as the crypto market grows, more and more exchanges are becoming available, and each exchange varies slightly in terms of security, fees, features, and offerings. 

Given the many options available, determining which exchange is right for you can be a difficult task. To make the process simpler, we reviewed and rated 28 popular crypto exchanges using criteria relevant to prospective customers. This guide explains our evaluation process. 

Investing in cryptocurrencies, Decentralized Finance (DeFi), and other Initial Coin Offerings (ICOs) is highly risky and speculative, and the markets can be extremely volatile. Consult with a qualified professional before making any financial decisions. This article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies nor can the accuracy or timeliness of the information be guaranteed.

Our Rating Process

To objectively evaluate each exchange, we collected data on and compared 28 companies across the following categories:

  • Security
  • Fees
  • Offerings
  • Availability
  • Features 

Within each category, we considered several factors, such as the number of spot currencies and order types supported, total countries where the exchange is available, trading fees, and more. We scored each factor on a 0-to-1 scale (or as a zero or one, depending on the factor), with zero being the worst possible score and one being the highest possible score. 

We then assigned a percentage weighting to those scores and established an overall 1-to-5-star rating for each exchange. One star is the lowest possible rating, and five stars is the highest.

Data Collection

Data collection was a key part of our evaluation process. We gathered data from company websites and media contacts to ensure we had the most accurate information possible to rate each crypto exchange objectively. Our research team collected 924 data points (33 data points per company) and weighted more than 20 criteria to determine company ratings.

Security

For those interested in crypto trading and investing, security is an essential factor to consider when choosing an exchange. With this in mind, we evaluated several factors related to security, assigning a zero or one score to each and a percentage weighting according to importance:

  • Decentralized (10%)
  • Cold storage (10%)
  • Know-Your-Customer (KYC) standards (2%)
  • Multi-factor authentication (10%)
  • FDIC insurance (5%)

Decentralized

We evaluated whether each cryptocurrency exchange was centralized or decentralized. With centralized crypto exchanges, transactions are facilitated by a third party. It’s relatively easy to get started with a centralized exchange, and many popular exchanges such as Coinbase and Gemini are centralized. 

With decentralized exchanges, transactions aren’t facilitated by a third party. Instead, users control their funds and buy, sell, and trade directly with other users. Transactions are recorded on the blockchain upon which the exchange is built. Because of this, decentralized exchanges are generally considered more transparent and secure. 

We assigned centralized exchanges a score of zero in our evaluation, and decentralized exchanges received a score of one. Whether a company is decentralized accounts for 10% of its overall star rating.

Cold vs. Hot Wallets

We also considered whether the crypto exchanges we evaluated offered hot or cold wallets or a combination of both. Hot wallets are internet-connected, while cold wallets are not. In general, cold wallets are considered more secure, but it’s easier to buy and trade cryptocurrency using a hot wallet. 

Exchanges offering cold wallets or a combination of hot and cold wallets received a score of one, while those offering no storage received a score of zero. These scores make up 10% of our overall star ratings.

KYC Standards

Know-Your-Customer, or KYC, standards were developed to help minimize instances of fraud and money laundering on financial platforms. Crypto exchanges that follow KYC standards require that users verify their identities. Typically, this involves sharing some personal information or providing a copy of a government-issued photo ID, such as a passport or driver’s license.

Exchanges following KYC standards received a score of one in our evaluation, while those not following KYC standards received a score of zero. These scores account for 2% of our overall star ratings. 

Multi-Factor Authentication  

Multi-factor authentication involves authenticating your account through SMS or a third-party service like Google Authenticator before you can log in. Accounts with multi-factor authentication are generally considered more secure than accounts that don’t offer this added layer of protection. 

In our evaluation, we assigned exchanges offering multi-factor authentication a score of one, and exchanges that didn’t provide this security feature received a score of zero. These scores account for 10% of our overall star ratings.

FDIC Insurance

While cryptocurrency is not FDIC-insured, some crypto exchanges offer FDIC insurance for U.S. dollar amounts held on their platforms. Generally, this insurance is provided through partner banks. 

In our evaluation, crypto exchanges offering FDIC insurance through partner banks received a score of one, while those that didn’t offer it received a score of zero. These scores make up 5% of our overall star ratings.

Fees

Fees can vary widely depending on which cryptocurrency exchange you’re using. Given that this is an important consideration for crypto traders and investors, we compared various fees across exchanges. 

We graded each exchange’s fees on a 0-to-1 scale, with exchanges that offer lower fees receiving scores closer to 1. Scores were then weighted as follows, for a total of 20% of the overall star rating:

  • Trading fees (10%)
  • Deposit fees (5%)
  • Withdrawal fees (5%)   

Trading Fees

In our assessment of trading fees, we considered maker fees, taker fees, and derivatives trading fees. We compared fees across each exchange and assigned a 0-to-1 score for each fee type. These scores were then used to calculate an overall trading fee score, which accounts for 10% of our total star rating for each company.  

Deposit Fees

We also looked at both crypto and fiat deposit fees for each exchange, and companies that offered no fees or lower fees received higher scores on our 0-to-1 scale. We then assigned an overall deposit fee score, which makes up 5% of each company’s star rating.  

Withdrawal Fees

Crypto exchanges also charge withdrawal fees in certain cases. During our evaluation, we looked at each company’s crypto and fiat withdrawal fees and assigned a 0-to-1 score for each. We then used the crypto and fiat withdrawal fee scores to develop an overall score. This score accounts for 5% of each company’s total star rating.

Offerings

In our evaluation of each exchange, we also considered its offerings such as how many cryptocurrencies are supported. We collected data on the following criteria and assigned a percentage weighting based on importance:

  • Crypto assets (5%)
  • Derivatives (4%)
  • Order types (4%)
  • Over-the-counter (OTC) trading (2%)
  • Third-party trading bots (1%)

Crypto Assets

Certain exchanges offer more supported cryptocurrencies than others. Those that offered a higher number of supported assets scored higher on our 0-to-1 scale, while those that offered a limited number of assets scored lower. These scores accounted for 5% of each company’s total star rating.

Derivatives

Derivatives are a type of contract between a buyer and seller, and the value of the contract is tied to an underlying asset. In the case of crypto, a derivatives contract’s value aligns with the value of an underlying coin or token. There are several types of derivatives contracts that can be used for different purposes. For instance, traders may use a futures contract to speculate on the future price of an asset, and the contract could stipulate certain buy and sell commitments. 

In our evaluation process, we considered whether each crypto exchange offered derivatives, as well as the types they offer. We scored each company on a 0-to-1 scale based on the number of derivatives it offers. Exchanges with several derivatives options received higher scores. These scores make up 4% of our total company star ratings.   

Order Types

Different cryptocurrency exchanges may offer different order types. For instance, some may offer limit orders, which allow you to specify a maximum price for which you’ll purchase an asset or a minimum price for which you’ll sell an asset. Others may not offer this order type. 

We collected data on the different order types each exchange offers and then used this data to score each company on a 0-to-1 scale. Exchanges with a larger number of order types received a higher score than those with a smaller number. These scores accounted for 4% of a company’s overall star rating.

OTC Trading

If a cryptocurrency exchange supports OTC trading, it allows two parties to conduct transactions directly instead of through the exchange. OTC trading is often used by those who want to buy or sell a large amount of cryptocurrency. Some exchanges offer this option for institutional traders or high-net-worth individuals looking to make large transactions. 

We collected data on whether or not each crypto exchange we evaluated supports OTC trading. Exchanges that support this option received a score of one, while those that did not received a score of zero. These scores make up 2% of a company’s overall star rating.

Third-Party Trading Bot

We also considered whether or not exchanges we evaluated support third-party trading bots. These trading bots, which allow users to customize their trading experience, can integrate with an exchange’s API. They may offer added value to high-volume users or those looking to automate their trades. 

Exchanges that support third-party trading bots received a score of one in our evaluation, while those that do not received a score of zero. These scores make up 1% of our total star ratings for each company.  

Availability

During our evaluation process, we also considered the availability of each crypto exchange on our list. We looked at the following factors in this category and scored each exchange on a 0-to-1 scale based on its availability. Then we assigned a percentage weighting to each and used those percentages to calculate our overall star ratings.

  • Countries available (5%)
  • Fiat funding options (8%)

Countries Available

Due to regulatory factors, crypto exchanges generally aren’t accessible in every country. For instance, Bitfinex is not accessible in the United States. Exchanges that were available in more countries received a higher score in our evaluation, and these scores accounted for 5% of our overall star ratings for each company.

Fiat Funding Options

To assess availability from a funding perspective, we also considered which fiat funding options each company offers. We looked at three different factors related to this category and came up with an overall fiat funding score, then each score was weighted and used to tabulate our overall star rating. 

Categories and percentage weightings are as follows:

  • Funding via online service (3%)
  • Funding via ACH transfer (3%)
  • Funding via wire transfer (2%)

Features

As you’re comparing crypto exchanges, you want to ensure that each exchange has the features you want. For instance, you might be interested in applying for a credit card that earns crypto rewards or earning interest on your crypto. Some exchanges may offer these features while others may not. 

In our evaluation of features, we considered the following criteria, scored each on a 0-to-1 scale, and assigned percentage weightings based on importance:

  • Credit card with crypto rewards (2%)
  • Ability to earn interest with crypto (2%)
  • Crypto lending (2%)
  • Customer support (5%)
  • Other rewards options (3%)

Credit Card With Crypto Rewards

Certain exchanges offer co-branded credit cards that allow you to earn crypto rewards for your day-to-day spending. For instance, BlockFi offers a Visa credit card that allows users to earn 1.5% back in crypto rewards on their purchases. We considered if exchanges offered a crypto rewards card in our evaluation, and this factor accounted for 2% of each company’s total star rating.

Ability to Earn Interest With Crypto

Some investors want to earn interest on their crypto holdings by holding it on an exchange or lending it to others, so we also considered this in our company evaluations. The option to earn interest on crypto makes up 2% of each company’s overall star rating. 

Crypto Lending

If you’d like to borrow against your crypto holdings, some cryptocurrency exchanges offer this option. We collected data on whether or not an exchange offered crypto lending, and the availability of this option makes up 2% of our overall company ratings.

Customer Support

Since many crypto exchanges are relatively new, they may not offer many options for customer support. But as a customer, being able to access customer support is essential if you encounter problems or have questions about your account. Given this, we collected data on customer support options and scored each exchange on a 0-to-1 scale based on the number of options available. Customer support scores make up 5% of our overall company star ratings.

Other Rewards Options

Certain exchanges offer rewards for specific actions, like referring a friend or maintaining a high balance of a specific asset. Rewards may come in a few forms, including bonus earnings or discounted fees. We assigned a 0-to-1 score to each exchange based on the number of rewards it offered.     

Choosing the Right Cryptocurrency Exchange for You

For those interested in trading or investing in crypto, choosing the right exchange is important. But several factors will likely influence your decision.

Using publicly available information, we evaluated several top cryptocurrency exchanges and rated them based on factors of importance to prospective customers. As part of our evaluation process, we considered security features, fees, offerings, availability, and other factors. While we strived to be as objective as possible in our ratings and reviews of each crypto exchange we evaluated, determining which exchange is right for you will depend on your individual needs and preferences. 



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