Apr 26, 2021

All Crypto Exchanges Are Not Created Equal

Last week saw the collapse of two crypto exchanges in Turkey. One of them, Thodex, saw the CEO allegedly abscond with $2b investor funds. What can we learn from this crash?

Ten days ago Turkey announced a ban on cryptocurrency payments. This was seen as either a crypto crackdown or a step towards regulating the market. Now two of the biggest crypto exchanges in the country have shut down. Vebitcoin cited financial strain and closed shop. While the Thodex founder allegedly made off with investor funds, it remains a question how many of the funds were really there, as the exchange faced fraud allegations in recent months. The crypto market in Turkey grew tenfold since November which theoretically should have provided its exchanges with more revenue and stability. Apparently exactly the opposite happened, begging the question if these and other local exchanges were and are really legitimate businesses.

What happened in Turkey is not really surprising. „Cryptocurrency exchange“ is a term used to describe very diverse companies. They are not standardized like stock exchanges, which are usually strictly regulated. Anyone with a small amount of liquidity and a concept to get the first few users can start a crypto exchange basically from scratch. On the other side of the spectrum from such garage operations you have unicorns like Coinbase, Binance or Kraken which employ hundreds of people. Monthly trading volume on the biggest exchanges exceeds $1t, while on the tiniest ones it can be a million times lower.

As even the smallest crypto exchanges hold significant amounts of customers‘ funds, they are a prime target for criminals and scammers. Security costs money and time and not all exchanges devote enough of both to keep their customers' funds safe and sound. Furthermore in some countries exchanges are not regulated, meaning no one can really say if the money deposited to the exchange is really there.

Verifying the size of the exchange is a challenge in itself. Some of them inflate deal flow with fake and wash trading, aiming to appear more legitimate and serious than they really are. While crypto wallets are public, verifying fund volume deposited at an exchange is also non-trivial. Exchanges regularly create new wallets and transfer money between them - some do it to evade scammers, others to obfuscate their trading volumes.

So if you want to buy crypto, what is the best way to minimize the risk of stepping into an unsavoury exchange? First of all restrict your choice to the biggest ones. Major exchanges have insurance funds, cold wallets to protect your funds, multi-sig access to wallets meaning no one person can run away with your money and extensive cyber-security measures. Not all of them have these at the same level and you can check our Security Score to understand the differences. However they will still usually have stronger safeguards in place then the upstarts.

Secondly look where the exchange is based. The entity servicing you should be based in a country with solid regulation, like US, most of the EU, Japan, Korea etc. While this will usually mean the exchange will require KYC and you will not be anonymous, it is a reasonable price to pay for higher security. Bigger exchanges have multiple entities so check on which of those are you exactly registering.

One thing you should not do is shop local just for the sake of it. People tend to use local exchanges because of familiarity, brand recognition or the fact they are often best attuned to local payment methods. While these are good arguments for consumables shopping, when it comes to depositing money, trust should take precedence above everything else. And there are far better proxies for trust than just being local. Even honest exchange founders can fail due to insufficient security awareness or budget. A company worth double digit billions like Coinbase, Binance or Kraken can manage top level security and paying the bills at the same time.

So don‘t be too generous with your trust. Think of creating an account at a crypto exchange as of borrowing it money. Which one would you trust enough to do that? What would you check beforehand? If you need help with that, feel free to peruse our exchange comparison to find a reasonable compromise between security and price.