A Beginner's Guide to Learning All About the Bitcoin Exchanges
Ever since the launch of Bitcoin in late 2009, we have seen the cryptocurrency market soar to new heights. Not only have there been a number of new entrants to the cryptocurrency market, but both new and existing digital currencies have seen exponential increases in their market prices. The digital currency market is far from slowing down and many financial gurus are of the opinion that it is only just picking up.
As we see more countries in the developed world accepting digital currencies and making them part of their mainstream economy, the usability of these digital assets is increasing for the average person. Where just a few years ago it was more of a hobby, today it is a streamlined financial asset with incredible real-world value. Moreover, as blockchain technology is being refined further, its applicability in several industries is becoming more common. What started off as a simple ledger to enhance accounting is now affecting everything from supply chain management to international payment systems and even security solutions. Organizations from industries as varied as car manufacturing, oil and gas to food and beverage, are all making use of this revolutionary technology.
As we see the shift to digital mediums only impacting more and more areas of everyday life, it’s apparent that digital currencies will play an important role in the virtual economies of the future. While you are probably familiar with cryptocurrencies and the fact that they have high-profit potential, in order to get your hands on some digital coins you need to go through what's known as a cryptocurrency exchange. It's a relatively straightforward concept, this is what you need to know about digital currency exchanges.
What’s an Exchange?
You are probably familiar with stock exchanges and how stock trading takes place on some of the big stock exchanges such as the New York stock exchange and the London stock exchange. You buy stocks in a company at a low price and sell them at a higher price for a profit. The concept of stock trading and cryptocurrency exchanges is similar, with some technical differences.
Essentially the purpose of the digital exchange is to connect people who have digital currency with people who want digital currency and facilitate trade. The first difference is that digital exchanges don't have a physical location where you can sit and do trade, these are just websites on which you register, log in, and trade. They are purely digital.
Do I Need an Exchange?
Yes and no. Initially, when you first want to buy some digital currency, you will need to go through an exchange where you can convert fiat money (USD, GBP) into digital currency (Bitcoin, Ethereum). You can either purchase digital currency by value, as in $10,000 worth of Bitcoin, which will give you a fraction of the coin, a bit like the "ownership" you get of a company by owning a few of its shares. Or you can buy according to the number of coins, like buying a certain number of shares in a company.
This is particularly the case in situations where the value of the coin is very large. For low-value coins, you can buy a dozen for a dime, for very high-value coins, if you decide to invest in bitcoin, for example, even an investment of $10,000 wouldn't buy you an entire coin, but you can still trade the fraction of the coin you own.
Can’t I Buy Directly From a Friend?
Unfortunately, you can't really do that with digital currencies, if you could, it would defeat the purpose of the blockchain technology behind the digital currencies. One of the main reasons why digital currencies are so secure is that every transaction that ever takes place in the currency's life is recorded and copies of this record are distributed across several ledgers, making it very difficult to change.
If you do want to trade within a small group of people, you can use smaller platforms known as peer-to-peer networks, which are great for buying and selling cryptocurrencies in small volumes.
When you go through the large exchanges, they will often require you to prove your identity in order for you to be eligible to trade on their platforms. Smaller trading platforms, those with less volume of trade, don't have this requirement and you can hop on to the network anonymously and trade away.
Which Exchange is Best?
They are all very different in the functionality that they provide and each has its own good and bad. It really depends on what you are looking for and the kind of services that you will need to facilitate your trading style. One big difference is that some exchanges are purely digital currency platforms, the only commodities that you can trade there are going to be coins for digital currencies. Some exchanges accommodate both digital currencies and fiat currencies, so if forex trading is up your street, then these are the type you should consider. Moreover, you will also find that different exchanges and even different small trading networks have different crypto rates. While this might not be a problem, if you are only trading in small volumes, you will barely feel the difference, but as you build your portfolio, the small rate differences can translate into quite a difference for you as a trader. So keep an eye out for rates on the platform you use and be sure to check others as well. Along with crypto rates, exchanges also charge for the services they offer, and different exchanges are priced differently. Again, there is no right and wrong in this, it all boils down to your personal preference and what is most feasible for your situation.
Last but far from the least, crypto exchanges also have their own reputations. While the big names are not a problem or a concern, smaller exchanges can be tricky. People have fallen victim to shady exchanges and ended up losing money in these scams. So before you invest, just make sure it’s a reliable platform that will be around tomorrow.
Unlike traditional stock exchanges, digital currency exchanges are not interlinked and don't have a central governing body, the only body that governs a digital currency is the open market. This is why you will see some discrepancies in pricing and even reputations. These are some of the fundamentals you should keep in mind when using an exchange, but don't forget to carry out your own research and make an informed decision.