Going to a Bitcoin exchange to buy the cryptocurrency is one of the most common ways new investors get their hands on Bitcoin or other digital currencies. Offering trades for a wide range of crypto-coins and an easy-to-use system for buying and selling, cryptocurrency exchanges are the number one practical solution for many new users as well as more experienced Bitcoin traders.
If you’re interested in buying Bitcoin for the first time but you’re puzzled as to how Bitcoin exchanges work or how to find the best place where you can buy your Bitcoins, here’s an easy guide to all you need to know about Bitcoin exchanges.
How Do Bitcoin Exchanges Work?
Bitcoin exchanges are basically online markets where you can exchange your money or your cryptocurrencies for other cryptocurrencies. Bitcoin exchanges are the “middle-man” that connects buyers and sellers together, arranges the exchange of funds, and charges a fee for doing so. Of course, they are also much more than just a link between the two.
How the Buying Process Works?
Like stock exchanges, Bitcoin exchanges offer several ways you can buy the cryptocurrency. Every buy is initiated with a buying order that you have to complete and submit to the exchange. Once the requirements of your order have been fulfilled, the exchange will execute the order, get you your Bitcoins, and charge you for it.
The most common types of orders used in a Bitcoin exchange are market orders and limit orders. The market order is basically an order that gets immediately executed against the best price in the order book. This is a fast solution for buyers who want to get Bitcoins as fast as possible under the best available price at the moment of buying.
A limit order, on the other hand, is an order that lets you specify the amount of money you want to buy or sell your Bitcoins for. Once the market price reaches that limit and there is a seller with an asking price that matches your bid, the order will be executed. This is one of the most basic types of orders you can find in exchanges but there are also more advanced options to choose from:
- Stop orders – Order with a specific “stop” trigger that activates a buy or sell when a market price reaches a certain point.
- Stop-limit orders – a combination of a stop and limit order when you can precisely control at what price point the order will be filled, but also halted if the price climbs or drops too fast before the order is complete.
- Hidden orders – orders hidden from the order book to prevent traders from copying or following your orders.
- OCO (One Cancels Other) – An order that allows you to set up pairs of orders. If one order is fulfilled partially or fully – the other will be cancelled automatically.
How Exchanges Make Money?
The main source of income of Bitcoin exchanges is the exchange fees they apply to buyers and sellers. Any order that gets executed is charged a certain fee, no matter whether it’s a buying or a selling order. The percentage of the fee charged by an exchange will depend mostly on the trading volume of the exchange, i.e. how many transactions per day it has.
There are many exchanges with fees that range from 0% to 0.35%, depending on how much you trade at the exchange and whether you’re a “maker” or a “taker”, i.e. whether you add liquidity to the exchange or remove it. There are also exchanges that charge fees only to sellers.
Exchanges also make money by charging transaction fees for certain deposit methods, margin funding fees, currency conversion fees, or even fees for erroneous transactions. In most cases, you will only be charged a deposit fee if you deposit a small sum of money into your wallet but not for any bigger investments.
Is There A Registration Process?
Bitcoin exchanges have been dealing with increased scrutiny in recent years, especially since the price of Bitcoin started rising dramatically. Most exchanges now have a registration requirement which is often a multi-step process you have to complete before you are allowed to deposit any fiat money (regular money) or cash it out from the exchange.
But if you already own other cryptocurrencies, you can also exchange them directly without going through the registration process. However, when doing so, it’s important to follow the exact procedure for transferring your coins or you might risk losing them in the process.
What to Consider When Choosing an Exchange?
There are dozens of Bitcoin exchanges out there trying to compete against one another and attract users with better fees, easier user interfaces, or more buying/selling options. To find the best place to buy your Bitcoins, you will have to consider a number of important factors, the key being:
- Fees – Fees are one of the most important criteria when looking for a Bitcoin exchange. When comparing fees don’t just look at how high or low they are but also whether they are adjustable according to the amount of trading you do, especially if you are planning to buy/sell often.
- Volume and liquidity – An exchange with good liquidity can handle a bigger amount of sales or buys of a cryptocurrency without its prices suffering too much. Exchanges with higher monthly transaction volumes have a better liquidity and can offer more competitive prices than smaller, more obscure exchanges.
- Accepted payment methods and currencies – Whether you want to pay by PayPal, pay with your credit card, or use a bank transfer to fund your purchases, your exchange should be able to offer you the option as well as the currency you want to use.
- Cryptocurrency offer – Having more cryptocurrencies at your disposal will not only come useful when you want to diversify your investment portfolio but also when you want to buy more Bitcoin.
And finally, it never hurts to check what kind of customer support you can find at a Bitcoin exchange. Problems with your deposits or orders can happen at any time and it’s always better to have full-time support or a direct phone line you can call than having none of those options.