To swap or not to swap: How to define a crypto exchange you can trust

After everything we as a crypto community went through in 2022, now is a great time to reconsider our approaches to choosing a crypto exchange. No business is flawless, but it is within our power to avoid running into an outright deception you will mourn in half a year.

What are the qualities of a good exchange? How do you define whom you can trust in this exciting but dangerous crypto world?

Liquidity

Liquidity is one of the most significant problems that cryptocurrency exchanges have, as the FTX high-profile meltdown has revealed. Overallovcation in low-liquidity tokens played havoc with FTX and dropped the first domino bone, leading to a long concatenation of consequences still affecting the space.

It’s been two months since the fraud of Sam Bankman-Fried broke upon the crypto space, and we are still trying desperately to pull ourselves out of this wreck and put an end to the chain of crushes it started. Now Genesis is next in line — the company that paused withdrawals in the middle of November under tightening liquidity conditions. Reportedly, the crypto lending arm of Genesis Trading could file for bankruptcy as a number of negotiations between itself, its parent company DCG, and Genesis’ creditors came to a standstill. All these are consequences of the liquidity crisis perpetrated upon us by SBF.

BlockFi is another example. Formerly one of the largest crypto lenders had to file for bankruptcy last November after receiving a $400 million credit line from FTX in June 2022. First, FTX saved BlockFi, but later this move turned into a meltdown for the distressed crypto firm.

Risk aversion

BlockFi wasn’t the only business SBF strove to save. He also tried to rescue Voyager Digital with a large loan and made other deals to help decaying cryptocurrency businesses. FTX CEO repeatedly struck high-risk bargains, saving companies on the brink of the fall. Some of these deals caused losses which led FTX to its demise.

What do we have here? The exchange’s CEO was multiple times mixed up with pretty risky deals no one else would get into. From the outside, it looked like he was a saver, a genius, and that’s what people called him. But if we dig deeper, the question arises: shouldn’t these actions of SBF have alerted us? Is it okay for a crypto exchange owner to get involved in such large, unsafe pricey deals with heaven-knows-their-source money?

The point is you need to look for a stable exchange that does not jeopardize its solvency and, respectively, does not endanger its users’ funds. It demonstrates, among other things, respect for its community and overall prudence — two crucial and hard-to-find qualities a good crypto exchange must possess.

Reliability

Over the past two months, the good practice has spread among crypto companies and exchanges in particular: they started publishing data on their reserves. Generally, the reliability of exchanges that did not do this so far falls into significant doubt. In the post-FTX world, it is a necessary minimum to be considered reliable. An exchange should be fully open about its balance sheet — this is an axiom now.

It is great if the company already runs a profitable undertaking because you know where its money comes from. You know that it does not exist only on the fees of transactions processed and that this exchange is a part of a large complex business standing firmly on its feet. It implies that the company has a steady income source, allowing it to maintain reserves in excellent condition.

HEXN Smart Exchange is a great example. The company gained ground as a lending platform and not just revealed its full balance sheet demonstrating its solvency and allocation in high-liquidity assets — but created a whole Proof-of-Reserves page that is regularly updated. HEXN.IO does not exist only due to its exchange — this feature became a step in the path of a never-stopping development journey of the company.

The Smart Exchange concept also created a new growth area for crypto exchanges as a whole. The deferred settlement proposition solved the eternal problem: dissatisfaction with the profit you get from the transaction. Every exchange transaction is profitable if you gain interest in addition to your proceeds.

Conclusion

Undoubtedly, the crypto world is vast, and numerous exchanges are committed to the abovementioned principles. And there will be more and more of them in the coming years: they will show up with new approaches and propositions, as it should be in such a big-potential field. Your job here is to avoid getting tricked by a beautiful cover, a famous, wealthy owner, and not to get the herd instinct to guide your actions. Do your own research and stay safe.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.