Using Centralized Exchanges

Chapter 7:

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Centralized exchanges are the big banks of the crypto world. It is my opinion that a few of them, and their leaders, are a force for good, but using a centralized exchange is counter to the ethos of crypto, and we should use them as little and as infrequently as possible, and most of all, never use them as a savings account. After all, we have learned that crypto is about self-custody, not leaving our money with an institution, an exchange can freeze, lose, or steal your funds, and an exchange is entirely centralized, so even if an exchange is managed ethically, it will always have premises with a front door that biased government agencies can kick down.

However, Buying Bitcoin in Chapter 4: Using Bitcoin was expensive; we need a better solution before we proceed, and this is where the necessary risk of centralized exchanges comes in. Therefore, in this chapter, we will see how to buy some crypto, and we will also see how we can immediately withdraw it to our wallet.

As a side note, there are decentralized and more private ways of buying Bitcoin, like Bisque, HodlHodl, and Mt Pelerin. Still, they require further research for each jurisdiction and are advanced topics for discussion another time, perhaps in the next edition of this book.

Also, you might have noticed by this point that there is much more to know about crypto than just Bitcoin. Indeed, Bitcoin has the biggest market capitalization, Bitcoin started it all, and arguably Bitcoin underpins the whole industry, but there is still more than just Bitcoin.

An altcoin refers to anything that isn’t Bitcoin or the number two crypto, Ethereum. Some say it refers to anything that isn’t Bitcoin. It means an alternative coin. While using exchanges will expose you to these altcoins, I don’t recommend buying any until you have done further research.

To begin to familiarize ourselves with these centralized entities, we will tour some popular centralized exchanges to see the vast choice in features and tokens so you can start by making your own decisions and buy Bitcoin or other tokens once you are ready.

Two cautionary tales

What follows is two exchange horror stories where people could have lost everything. And just to be clear, this list is incomplete.

Mt Gox

Mt. Gox was one of the first and largest Bitcoin exchanges. It was based in Tokyo, Japan, and at its peak, handled over 70% of all Bitcoin transactions worldwide.

In 2014, Mt. Gox suddenly suspended trading and filed for bankruptcy, claiming that 850,000 Bitcoins (valued at around $450 million) had been stolen from its digital wallets due to a security breach. The news sent shockwaves through the crypto community, and many lost significant amounts of money.

It was later revealed that the cause of the loss was due to poor management, inadequate security measures, and technical problems rather than a single hack. The company had been struggling with security issues for years, and many Bitcoins were gradually stolen.

After the bankruptcy, a complex legal process occurred to determine what would happen to the company’s remaining assets. It took several years, but eventually, the creditors could recover some of their losses, and the remaining assets were distributed among them.

However, many Mt. Gox customers were never able to recover their lost funds, and the total financial losses from the collapse of the exchange are estimated to be in the hundreds of millions of dollars. It is still remembered as one of the biggest failures in the history of Bitcoin and cryptocurrency, and some are still waiting for the return of their stolen Bitcoin.

So it can’t get any worse, then?

FTX

FTX was the rising star of crypto exchanges. Its young billionaire founder, Sam Bankman-Freid, portrayed himself as a philanthropist and supported political causes with generous donations. He was in regular consultation with US financial regulators. He was seen (and trusted as) representing the crypto industry to ensure it got a fair deal as the US started introducing legislation.

Then it turned out he was gambling with users’ funds – at least, that is the media’s consensus now; I don’t make that allegation myself. He would send billions of dollars of FTX customers’ money to his other company, a hedge fund, and gamble it away trading on the crypto markets. This story is nuanced and fascinating. Unfortunately, this brief write-up doesn’t do it justice, but Sam, now known as Scam Bankster-Fraud, lives with Mum and Dad with an ankle tracking bracelet awaiting trial on charges that could see him in jail until after the last bitcoin is minted in 2140. User funds (whatever is left of them) are locked in a bankruptcy process with no end in sight, and the media use the failure of FTX, a regulated, centralized friend of the government, as proof that there is something wrong with crypto more widely.

Mt Gox was the first calamity, and FTX was the biggest, but they were all centralized. If your crypto is on a centralized exchange, somebody else has the private keys, and you have a number on a screen when you log in. That login can be revoked without notice, and your crypto can be sold to pay creditors or just plain stolen. So take your crypto off exchanges, even the ones that seem trustworthy.

Choosing an exchange

Which exchange you use will depend on many parameters, and we will discuss them next. However, some parameters will be specific to your circumstances and different between readers. The most significant parameter you must evaluate is what is available and legal in your country.

An excellent example of territorial availability is the Binance exchange. The Binance platform is available in most countries; significant exceptions include the USA, which has a scaled-back – but perfectly functional version just for the US called Binance US. Binance is currently engaged in a complex and serious dispute with US regulators. At the time of writing, Binance US is still trading and I still use the non-US Binance, but make sure you are up-to-date before transacting.

Binance is viewed with conflicting opinions. It is the most used exchange, the most fully featured, and with competitive fees and a wide range of cryptos available. Although, I have noticed withdrawal fees creeping up in recent months. Many crypto enthusiasts view Binance and its charismatic and public-facing CEO, CZ, short for Changpeng Zhao, as a boon to the crypto industry. Others are not so impressed and see Binance as bad for the industry because many users keep their crypto on the exchange (because of the exciting features) and because Binance has its blockchain, Binance Smart Chain, which is less decentralized compared to many (especially Bitcoin).

Whatever opinion you come to, it can’t be argued against that it is a feature-rich and easy-to-use platform you might like to consider. But, on the other hand, if you always withdraw your crypto and self-custody it, then the choice of exchange is less critical.

Another option is the Kucoin exchange. At the time of writing, on the Kucoin exchange, you can open an account, buy, and withdraw crypto without even telling them who you are. This is good for privacy but is not approved by governments as it will likely encourage illicit activities as well as legitimate privacy seekers.

Kucoin has a similarly wide range of cryptos and an excellent beginner feature where you can buy as little as $1 of crypto at a time. Most exchanges require you to buy $10 with each purchase. Buying a small amount of crypto each purchase is helpful when you want to invest regularly to get a good average purchase price for investment over time. This practice is known as dollar-cost-averaging or DCA. I DCA several cryptocurrencies but mostly bitcoin.

Kucoin has a trading bot feature where you can make regular purchases of small (or large) amounts of your favorite projects and just let the bot make repeat purchases. Kucoin doesn’t have quite the same array of features as Binance has overall, however. Binance has recently introduced a feature where you can DCA sub-dollar amounts of a wide array of cryptos. Be aware when purchasing small amounts that withdrawal fees seem more prohibitive. For example, at the time of writing, Kucoin allows you to auto-buy as little as two dollars of bitcoin and Binance sub-dollar amounts! But each wants more than $5 for a bitcoin withdrawal. Coinbase on the other hand has a very unaffordable auto-buy feature but just charged me just 69 cents for a Bitcoin withdrawal. As we saw in Chapter 4: Using Bitcoin, this is more like the real cost of transacting on Bitcoin. It is important to evaluate each exchange, its features, and costs to work out what is best for you. That is what we are doing so let’s proceed.

Crypto exchanges will always be seen as a little controversial; after all, we have just spent half a book explaining how we can self-custody our own money and how we don’t need these big, controlling institutions anymore. Crypto exchanges are the epitome of centralized institutions. So, make no mistake, if you buy crypto on an exchange and leave it there, you will likely lose it if the company goes bankrupt. However, it doesn’t mean we can’t use the facilities of an exchange to our advantage, especially when we are getting started.

Another big player in the world of centralized exchanges is Coinbase. Coinbase has a much smaller selection of coins than Binance or Kucoin, but it is well regarded amongst the banks, especially in the US, and you will likely be fine transferring money to and from Coinbase. Interestingly, the custodian of choice for Black Rock, the biggest Wall Street money manager on the planet, is Coinbase. It is hard to know if this is a good or bad thing. At the time of writing, however, Coinbase has just been served with a Wells notice by the Securities and Exchange Commission. The SEC claim Coinbase is selling unregistered securities. This is odd considering Coinbase was vetted by the SEC before the company went public in 2021. The chairman of the SEC has been vilified not just by the crypto community in general but by a string of US politicians. It is plain for most to see that the US institutions, SEC included, are waging a political war against crypto. You need to be aware of this before you swap your hard-earned money for Bitcoin. For me, I consider the political attacks as a sign that we need Bitcoin more than ever and I have purchased more. If, however, you were only considering bitcoin to make a quick profit, you need to be more careful as this political war could go on for years.

As with Binance, on Coinbase, you will need to complete KYC checks. In addition, Coinbase has two trading platforms, regular and advanced. If you don’t take the trouble to migrate to the advanced platform, the trading fees are the worst in the industry – worse than using the default provider for Exodus! However, if you use the advanced mode, they are just slightly more expensive than Kucoin and Binance. Also, at the time of writing, as mentioned, withdrawal fees for Ethereum and Bitcoin were much lower on Coinbase than the other two. The advanced mode on Coinbase is like the interface we will discuss in this chapter.

Apart from Coinbase in the regular mode, the trading fees are a fraction of 1% and only need to be considered if you make frequent or large purchases. Other centralized exchanges to consider are Kraken and Crypto.com. The point of this section is not to tell you which exchange to use but to get you started choosing the best one for you. I am signed up with all these exchanges and use them occasionally. Therefore, I suggest you browse the country availability, fees, and features for all of them and start with just one for now.

If you still can’t decide, reading this chapter to explore how to buy, sell and withdraw crypto might help you decide. The next chapter will discuss buying and selling crypto using a generic/typical user interface. This should be helpful and enable you to trade regardless of which exchange you choose.

Whichever exchange you choose, I am confident that with careful examination and thought, you can make trades on your chosen platform after reading the next few chapters. But don’t spend too much before you do more research. Furthermore, while learning, if you only put a small amount of money into an exchange, you limit the magnitude of losses from potential mistakes.

If you decide to get involved with something other than Bitcoin, one day, which tokens, if any, you decide to buy also affects your choice of exchange, so you could read the following few chapters. However, having more than one exchange account in the long term is likely helpful, so get started immediately or read more and take your time, whichever suits you best.

I am in the UK and the government is making positive noises about being crypto-friendly. The banks, however, are being deliberately awkward. TSB bank, for example, now gives you a survey before it lets you transfer your money and will not let you transfer your money to exchanges. Fortunately, there are two exchanges that TSB seem to have neglected to put on their blacklist and I encourage you to have more than one bank account and explore more than one exchange.

Furthermore, Binance has recently learned that the bank that allows UK customers to transfer money is withdrawing its services later this year. NatWest and TSB bank state it will not let you transfer money to crypto exchanges, for our protection! This is quite ironic since all these banks went bust in the 2008 financial crisis and needed taxpayer money to honor deposits. As I said to the unlucky Cooperative Bank assistant who insisted on questioning me before honoring my £150 transfer to Coinbase, “If I want to spend all my money on horse s**t and dump it in my garden, that’s my business.” He wouldn’t let the transfer go through until he had read a disclaimer and I stated clearly that, “I agree.” He did let the transfer go through, however. The forces against crypto are many and varied and the situation is extremely fluid. I will talk more about it in my other book. You can also subscribe to the likes of CoinBureau on YouTube which probably has the best, unbiased (as far as I can tell), beginner-friendly political coverage of all things crypto.

Summary

We haven’t visited a centralized exchange yet, but we are now ready to do so. While this book, by definition, is about not using centralized exchanges, we have discussed that we can use them to our advantage from time to time. It is vital to understand that even if you purchase a successful crypto, you can still lose everything if you leave it on an exchange that gets hacked or goes bust! In the next few chapters, we will learn about many different things we can do on an exchange, and you can then optionally decide to purchase and withdraw some crypto. If you don’t purchase because you want to learn and not invest – that’s fine! However, if you do purchase, always withdraw or be prepared to lose it without notice.

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