How Do Bitcoin Exchanges Work?

March 12th, 2018

Bitcoin exchange is a digital marketplace that gives Bitcoin traders the opportunity to buy and sell Bitcoin using traditional national currencies. Bitcoin currency exchanges are online platforms that act as the “middleman” between currency buyers and sellers. Since 2008, when Bitcoin first came on the market, there have been numerous online exchanges for Bitcoin.

Breaking Down ‘Bitcoin Exchange’

A Bitcoin exchange is a place or platform where buyers are able to “meet” with sellers. Just like in traditional stock exchanges, BItcoin exchanges allow traders the option to buy and/or sell Bitcoin by inputting a market or limit order. With a limit order set, the Bitcoin trader directs the online exchange to trade Bitcoins below or above the current bid based on whether he or she is buying or selling Bitcoins. When a market order is chosen, the trader is validating the exchange to trade Bitcoins for the best price on the online market.

Online marketplaces are easy to find and generally designate Bitcoin participants as either “takers” or “makers”. When the seller or buyer places a limit order, the online exchanges add it to the order book until the price is matched by any other online trader on the other side of the transaction. When the price is matched, the seller or buyer who set the limit price is referred to as a maker. On the other side of the coin, a “taker” is the person who places a market order, which then immediately gets filled.

Transaction Fees

All online Bitcoin exchanges have transaction fees that are applied to all completed buying and/or selling transactions carried out on the exchange site. This fee is based on the volume of digital currency transactions that are conducted. For example, the populer online exchange poloniex has a rate ranging from 0 to .25%, Kracken’s fee range from 0 to 36%, and Paxful charges around 1%. However, the buyer is not charged this fee.

How Do You Transact?

Users must register on these online exchanges before they are able to use them. They must go through numerous verification processes in order to authenticate the user’s identity. Upon successful authentication, an account is then open for the user, where they can then transfer funds into the account before he or she can buy Bitcoins. Different exchanges have different payment systems which can be used for depositing funds. These include, bank transfers, bank wires, credit or debit cards, money orders, bank drafts and even gift cards. A trader who wishes to withdraw money from the account can do so by the options provided on the exchange.

Making withdrawals and deposits come at a price based on the payment method selected for the transfer of funds. The higher the risk of a chargeback from a payment medium, the higher the fee will be. Wiring money to the exchange comes with a lesser risk of a chargeback compared to the funding from a PayPal account or from a debit or credit card, since funds can be returned or reversed by the user by request.

Extra Charges

To fund transfer fees and transaction fees, Bitcoin traders may be subject to the currency conversion fees based off of the currencies which are accepted by the Bitcoin exchange. For instance, if a user transfers US dollars to an online exchange that deals only with Canadian Dollars, the exchange or the bank will then convert the US dollars to CAD for a fee. In such cases, the best way to trade on a Bitcoin exchange is by selecting and exchange that accepts your local currency.

It is important to consider that Bitcoin exchanges are different from the Bitcoin wallet. The former offers an online platform for Bitcoin buyers and sellers to transact with each other quickly and safely. The latter is a digital storage service that is for the digital currency holder to store their Bitcoins securely.

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