If you are new to the world of cryptocurrency and looking to make your first Bitcoin purchase or get into trading, this guide will give you the ins and outs of how Bitcoin exchanges work. This is designed to provide you with related knowledge and help you make informed trading decisions.
Let’s get to it.
What is a Bitcoin Exchange?
There are a few ways of getting your hands on Bitcoin, none of them is particularly straight-forward. Buying cryptocurrency isn’t like walking into the local convenience store and picking something off the shelf.
Earlier, Bitcoin was easily mineable. With a bit of computing power, you could join mining pools that allowed you to harvest Bitcoin. However, the mining days are dying out. Although Bitcoin is still being mined, it is becoming increasingly difficult (impossible for anyone without sophisticated computer equipment and plenty of electricity) for even the most professional miners.
This means that for those looking to acquire Bitcoin there aren’t many ways available. You can either receive it as a gift or purchase it from someone who currently owns it. This is where the exchanges come into play. They facilitate the buying and selling of Bitcoin between the owner and the new acquirer and create a safe trading platform for this.
How Do Exchanges Make Money?
Exchanges will charge additional payment or fees on the transactions you make within the platform. This is akin to the fee structure of PayPal or other financial transaction processors. Some exchanges charge very high fees for their services because it is still expensive to send and receive money across borders. They lack the infrastructure to make the exchange process cheaper.
Other exchanges offer free or low-fee transactions, which you should be wary of. Some no-fee exchanges are looking to harvest your payment details to carry out scam activities. As mentioned above, it is still costly to transact across currencies and across borders. Even banks charge fees on foreign currency exchange. So, any platform that seems too good to be true should be given intense scrutiny.
Is there a way to enter the exchange “safe zone” though? Most reputable exchanges, like eToro, offer transactions with medium or market-rate fee levels. You will find that these exchanges are well-known, have been in operation for a number of years, and cooperate with the leading financial institutions.
Are Exchanges Safe?
Exchanges vary in their level of safety. Some take pride in their security processes, while others are a bit less risk-aware. Fortunately, the top-rated exchanges are regulated money service businesses that are bound to comply with the laws and regulations of the countries they operate in. Still, before joining any exchange site, check the certificates that they have.
Do I Need a Credit Card?
The answer is yes. But most big exchanges have full payment functionality and allow for bank or e-wallet transfers as well. Depending on which exchange you select you will find that there are different payment methods.
Some exchanges use the basic credit card payment system. Although it is easier to transact in this method, the credit card fees are inherently high. Other exchanges have switched to flexible platforms like PayPal to give users more payment-friendly experience.
What is a Wallet and Do Exchanges Have Them?
Like hard currency, your digital currency needs somewhere to be stored. We always advise using hardware wallets (detachable hard drives) and plugging them in only when you need to transact. Software wallets are also available. They are downloaded and function as a gate for cryptocurrency.
Exchange wallets are also available and come in two forms. Some exchanges provide free software wallets for their users to download. These are as effective as normal paid-for software wallets but they are free. The other version of the wallet is what you would view as your exchange account. Exchanges have to facilitate the buying and selling of the currency and in order to do this, they have collective wallets that hold user funds.
It is advisable to never leave all your cryptocurrency in the exchange account/wallet. Although some exchanges have never been hacked, it doesn’t mean that one day some clever hacker won’t be able to compromise them. It acts as one safety precaution that you, as a user, can take. So, remove funds from the exchange to your own private wallet.
All exchanges have different features, interfaces, and functionality. No two are the same. This means that when you have selected your exchange you will need to become accustomed to all its features and how the platform works.
If you use an exchange for the first time, there should be either a tutorial mode that carefully explains how things work, or a “dummy” mode, which allows you to familiarize yourself with the exchange using fake funds. Which option works best for you will be down to your personal preference as we all have different ways of learning. It is crucial not to skip this step as it can prove costly to realize that you have lost money because you failed to learn how the platform works.
Guest author: Mary Ann Callahan