There's never been a better time to be a crypto trader. Competition among top crypto exchanges is fierce. Each one is battling out to offer the best features and services to attract users. Today, there are many exchanges to choose from. However, not all exchanges are created equal, as each has its own drawbacks and benefits.
How do you choose where to trade crypto-derivatives when there are so many options?
Picking the right crypto exchange comes down to your individual expectations and priorities. Some traders are willing to pay higher trading fees for a sophisticated trading platform; others count costs above all else. Here's how to find the best crypto exchange for you.
Spot Exchange vs. Derivatives Exchange: What’s the Difference?
There are two kinds of exchanges in the cryptocurrency world; the spot exchange and the derivatives exchange.
The spot exchange facilitates fiat-to-crypto and crypto-to-crypto transactions. In the spot market, the settlement of crypto assets is executed immediately. This means cryptocurrencies are directly transferred between market participants (buyers and sellers).
On the other hand, a derivatives exchange facilitates the trading of derivative products such as futures and options. When you buy a derivatives contract, you do not own the underlying cryptocurrency. Instead, you own a contract with an agreement to buy or sell a particular cryptocurrency at a predetermined price and a specified time in the future.
Now that you know the difference. Without further ado, let’s discuss the six key factors to consider when choosing a derivatives exchange.
1. Safety & Security
Security is the number one priority of any exchange. Without the necessary safeguards, users’ funds, assets and personal data are always at risk. While each exchange has its own chosen security methods, the best practice is to establish multiple security layers.
Check to see if the exchange offers two-factor authentication (2FA). Some of the common avenues for 2FA are Google Authenticator, Authy and Yubikey, which provide better security than mobile text-based 2FA.
Each exchange also has various other security measures worth checking into, such as cold storage asset reserves and custodial storage services.
2. Insurance Fund
Insurance funds are safety nets that protect traders from adverse losses, where in some cases, traders may lose more than what they have. Insurance funds are used to prevent “socialized losses,” a situation in which the profits of profitable traders are used to cover the losses of insolvent traders.
With a well-capitalized insurance fund, traders need not worry about socialized losses, as the exchange will be responsible for the deficit. Certain exchanges may operate multiple insurance funds to ensure that losses are sufficiently covered in extreme volume spikes.
3. Technology and Infrastructure
The matching engine is a fundamental building block of any exchange that enables users to transact their orders efficiently.
A high-performance matching engine allows the exchange to meet high levels of demand even during extreme volume spikes. A high-performance matching engine provides the infrastructure to roll out new order types and trading pairs efficiently and at scale, ultimately enabling the exchange to create a better product for all users.
Technology and infrastructure should not be overlooked as they impact users’ trading experience and their ability to transact efficiently.
4. Liquidity & Volume
Market liquidity and volume are essential to traders because they impact transaction costs. In a liquid market, a seller will quickly find a buyer without cutting the asset’s price to make it attractive. Conversely, a buyer won’t have to pay an increased amount to secure the asset they want.
A liquid market is also associated with less risk. There is usually a counterparty willing to take the other side of a given position. This can attract speculators and investors to the market, which adds to the favorable market conditions.
Transaction cost is a big part of derivatives trading, especially if you are an active trader. Understanding the different fee structures among derivative exchanges can help you save a lot of money.
Generally, trading fees on cryptocurrency exchanges are charged according to the order types sent to the market. These fees are also known as “taker” and “maker” fees.
Taker fees are charged when you place an order that trades immediately, be it partial or full fill. Traditionally, these orders are known as market orders. Taker fees are more expensive than maker fees because taker orders are executed immediately, removing the order book’s liquidity.
On the other hand, maker fees are paid when adding liquidity to the order book by placing a limit order. Increasing the size of the order book is good for the exchange and other market participants. Thus, maker fees are generally lower than taker fees. Depending on your trading activity and volume traded, trading fees may vary.
If you are an active trader, you would probably choose an exchange that offers the lowest fees. Additionally, you can also develop trading strategies around the maker-taker fee model to take advantage of rebates or discounted commissions provided by exchanges.
6. Leverage & Range of Products
Lastly, you want to choose an exchange that provides a comprehensive range of products, be it in the types of derivatives or the selection of crypto-derivatives contracts available.
Having a wide selection enables you to expand your trading opportunities — especially when cryptocurrencies are getting more attention than ever from mainstream media. Investors are looking for investment opportunities beyond cryptocurrency “blue chips” (i.e., Bitcoin, Ethereum). Low-cap cryptocurrencies with promising growth potential may attract interest from both institutional and retail investors alike.
Additionally, many traders are drawn to the derivatives market because of the availability of leverage. Leverage makes derivatives trading extremely capital-efficient.
To purchase 1 BTC in the spot market, you would need thousands of dollars. With derivative contracts, you can open a position with a fraction of the cost. This is only possible with the use of leverage. The higher the leverage, the less you need to spend on a position.
Top-tier derivative exchanges such as Binance and BitMEX allow users to leverage up their positions to 125 times their initial margin. This means with a $1,000 investment, you can open a maximum position worth $125,000.
Community Preferred Crypto-Derivative Exchanges
Some crypto-derivative exchanges with strong reputations are Binance Futures, Huobi Futures, OKEx Futures and Deribit. These exchanges all have different features that attract certain types of investors.
For example, Binance Futures is excellent for beginners since it has a simple user interface. Binance is a perfect choice for traders searching for the hottest cryptocurrency futures as the exchange supports the widest variety of altcoins.
Binance Futures, the derivatives arm of Binance, is the largest derivatives exchange by volume and open interest. In January 2021, the exchange processed over $1 trillion in volume, eclipsing its competitors’ volume. Since its launch in Q4 2019, Binance Futures has been the fastest growing exchange in the industry, expanding its market share from under 10% to over 35% today.
Binance Futures has quickly become the go-to venue for retail users due to its continuous efforts to introduce innovative products, enhance users’ experience, and at the same time, ensuring a seamless and stable performance that users can rely on.
With the broad range of crypto futures contracts on offer, Binance Futures also delivers investors and traders numerous ways to enter the market. The Binance Futures trading platform is easy to navigate, making it suitable for advanced and the more novice trader and investor.
Binance Futures offers two futures platforms:
USDT-Margined Futures: Supports perpetual and delivery contracts with leverage of up to 125x and settled in USDT.
Coin-Margined Futures: Supports perpetual and delivery contracts with leverage of up to 125x and settled in cryptocurrency.
Altogether, Binance Futures offers over 172 derivative products:
- 95 USDT-margined futures contracts
- 35 Coin-margined futures contracts
- 36 Binance Leveraged Tokens
- 6 Binance Options
Binance Futures has a strong emphasis on security, offering 2-FA and anti-phishing measures. Additionally, KYC verification adds a protection layer for Binance Futures users. Binance Futures also operates several insurance funds to safeguard users from the risk of adverse market movements.
With the integration of Binance Spot and Futures markets, Binance offers a complete ecosystem for you to fully utilize your crypto assets and manage risk in your cryptocurrency portfolio.