Understanding the
World of Bitcoin Exchanges

Buying and selling bitcoin might look like a very intimidating thing to do, but it really isn’t. For the most part, it’s no different than using any other online payment system such as PayPal. Just pick an exchange and enjoy filling your pockets with the currency of your choice.

To put it briefly, a bitcoin exchange is a site that lets you store, buy or sell bitcoin, and this article will give you a small overview of the various options you can choose from.

As a small disclaimer, it’s important to know that there are some risks associated with trusting your money to a third party. Some irresponsible exchanges have lost customers bitcoins in the past and bitcoin theft can also happen. So be aware and understand this before proceeding.

Using an Exchange

Exchanges are central hubs that connect people interested in buying or selling bitcoin, making it easier for users to trade without the need of meeting up in real life to trade a specific amount of bitcoin. However, the definition of an exchange can often be a bit confusing, because the features they offer to users can vary to an extent. Some platforms include bitcoin wallets, while others simply allow buying and selling bitcoin. For this guide, we’ll define an exchange as the service that lets users to buy and sell bitcoin.

Before using an exchange however, you should have a wallet set up, so that you can store your bitcoins. So if you don’t have that, set yourself up first.

Using exchanges is notoriously intuitive and easy. Usually, you’ll have to link a bank account to your account in the exchange, which takes a couple days (Although Coinbase offers you the option to verify instantly if you use your bank username as a login). Other than that, the exchanges are pretty straightforward, you usually have two links to choose from, one for buying and the other for selling, you type in the amount you’re looking to purchase or sell and then click the button to submit the transaction.

One thing that you might find a bit bothersome with these virtual exchanges is that any deposit or withdrawal in fiat currency takes some time to process, usually from 2 to 5 days. If you want to get your money instantly however, check out LocalBitcoins, a place where you can find people nearby your location to buy or sell bitcoins. But if you like the convenience of online exchanges that remove the need to set up a meeting, waiting a couple of days isn’t that bad. That’s why exchanges like Coinbase are so popular.

Note: exchanges charge a small fee of under 1% for every transaction made.

Know your customer laws and regulations

Exchanges abide to state regulations, meaning that customers are required to verify their identity to actually participate in bitcoin trading. These regulations tend to differ from country to country, but two general laws that exchanges obey are the Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. This is something that a certain portion of the bitcoin user base doesn’t like, because in exchange for the convenience you lose the anonymity and privacy that bitcoin is intended to have.

The current state of bitcoin exchanges

There are plenty of bitcoin exchanges around, and more keep showing up with improvements regarding the bitcoin trade. However, the number of exchanges that have gained the trust of the community is way lower.

Among popular and trusted exchanges we have Coinbase, Kraken and cex.io, Coinbase being the most popular one due to its ease of use.

The exchanges mentioned tend to support the usual fiat currencies (USD, EUR). However, Coinbase does support more currencies. 

It’s also important to know that China and Russia are known to take a harsh stance against the currency, so it can be a bit tricky to figure out whether or not it’s a good idea to trust companies based in regions like these due to uncertain regulations, so try doing some research beforehand.

Constantly evolving security

Back in 2014, the most popular exchange was Mt. Gox based in japan. They launched back in July of 2010 and by 2014 they handled over 70% of every bitcoin transaction done worldwide. However, in February of that same year, Mt. Gox abruptly shut down the entire service, and shortly after filed for bankruptcy protection from creditors. According to Mt. Gox, a volume of approximately 850,000 bitcoins went missing and were most likely stolen, a theft valued at $450 million. Because of this, a fairly decent portion of the bitcoin community still prefers trading bitcoins in person using an app like LocalBitcoins.

With all of this said every exchange that came after Mt. Gox has focused on constantly improving security measures and transparency with their customers. In addition to this, every exchange nowadays is expected to have proof that shows they’re taking care of their customer’s money.

Post-Mt.Gox several exchanges passed a proof-of-solvency, Bitfinex and Kraken being a couple of them. The purpose of this is demonstrating that they actually hold the funds they claim to have. Bitstamp is a notable example, passing a test made by the core developer of Bitcoin, Mike Hearn.

It’s a step forward. Even if it’s not as thorough as a financial audit, it shows that exchanges want to gain the trust of their customers by following certain regulations.
As always, make sure to do some research when making investments like these, so that you can avoid the most common pitfalls. Pick a trusted exchange that’s also good, not just whatever looks more convenient and understand that there are risks associated with trusting your money to a third party.

Exchanges are not your only alternative, it just tends to be the most common and convenient one, but in reality, all methods of trading have their own pros and cons. If you’re still not interested in using exchanges or simply want more anonymity and control over your money, you can do your trading in person with a service like LocalBitcoin.

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