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How Bitcoin Exchanges Work

In order to fully understand how Bitcoin functions, you cannot avoid learning about Bitcoin exchanges. Put simply, a Bitcoin exchange is a website whereby a user can exchange fiat currencies such as the USD or Euro for Bitcoin. In many ways, you can think of Bitcoin exchanges exactly like you think of stock exchanges. At stock exchanges, traders exchange Dollars for stocks. When it comes to Bitcoin exchanges, the same exact thing is happening, only it isn’t stocks you are receiving, but digital currency.

The following few sections will go a bit deeper into how, exactly, these sites function as well as how you can take advantage of them.

The Basics

Using a Bitcoin exchange is a lot like how you would buy and sell stocks through any of the various stock exchanges that exist. In its most simplistic form, a Bitcoin exchange is where people go to both buy and sell Bitcoin. For someone who is looking to acquire their first BTC, the plan of action would be to create an account at a Bitcoin exchange and fund that account with USD (or any other type of fiat currency). Once your account has been adequately funded, you will then be able to use your USD in order to purchase BTC.

Inversely, someone looking to rid themselves of some or all of their Bitcoin holdings will exchange their BTC for USD. It is really this simple. What’s more, creating an account and utilizing a Bitcoin exchange is often a lot simpler than creating an account for buying and selling stocks. Of course, every site is different, so the exact requirements when it comes to creating and utilizing account can and do vary.

Trading and Buying

Once you have an account at a Bitcoin exchange and have acquired, or bought, your first Bitcoin, you will then be able to send BTC to people, companies, and whoever else with just a few clicks of the mouse. In order to do this, you will need to utilize a Bitcoin wallet. At this point in time, most every Bitcoin exchange also features a wallet. When you think of a Bitcoin wallet, you can liken it to your online bank account, or an e-wallet account from sites like PayPal. The Bitcoin wallet is where your purchased Bitcoin will be stored.

If you have Bitcoin in your wallet and are attempting to send it to a person or business, the process is simple, but also something you have probably never dealt with before. Before you can send BTC to someone, you will need to know their Bitcoin wallet address. Much like you cannot send someone an email without knowing the intended recipient’s email address, you cannot dispatch Bitcoin without knowing the recipient’s Bitcoin wallet address. Unlike an email address, however, your Bitcoin wallet address is not able to be created by you. Instead, it is a randomly generated series of numbers and letters. Once you have the address, sending Bitcoin is, quite literally, no different than sending an email, transferring money to/from a bank account, and/or sending money with PayPal. The transaction will take place in a matter of seconds.

If you are going to be the intended recipient of Bitcoin, the inverse of the above needs to take place. You need to supply the person who will be transferring you BTC your Bitcoin wallet address, and the funds can then be sent directly to you.

Something that must be noted and emphasized is the importance of sending money (or having money sent to) the absolute correct Bitcoin address. In the event that you are even a single character off, the Bitcoin will not only never reach its intended recipient, the funds are also typically lost forever. For this reason, it is imperative that you both double and triple check the accuracy of the Bitcoin wallet address that will be utilized.

Fees

As you could have probably guessed, the use of a Bitcoin exchange does not come without some sort of fee. After all, the exchanges that exist need to make money, otherwise they will no longer be able to operate. While we can say that there are fees on just about every exchange, the way in which fees are charged can vary dramatically from exchange to exchange.

In most cases, sending or receiving Bitcoin carries with it some very small fees. More often, you will find that the biggest fees come when you are attempting to purchase BTC with USD, or when you are attempting to sell your BTC for USD. These types of transfers often carry with them some fees and, in addition to that, also tend to take a bit longer to process. Once again, however, these are items that can and do vary by site.

Transaction Times

If you are sending BTC from your wallet to another wallet address, the transaction will process in a matter of moments. In almost every way, these transactions are identical to how you would move money from one e-wallet to another. When you are attempting to purchase BTC with USD or sell BTC for USD, this is when you will run into longer transaction times.

As we mentioned above, the exact time it will take in order for a transaction to process depends on a few different factors. For one, the size of the transaction plays a major role in the time it takes to process. If you are attempting to buy $10,000 worth of BTC, the transaction will take longer to process than if you are only attempting to purchase $10.

Something else that plays into the length of time it takes for a transaction to process is the site you are using. Exchanges that have been around for a while and have solid infrastructure and operating systems tend to process BTC transactions faster than those newer, less proven sites. Reading reviews for Bitcoin exchanges is something we highly recommend. Typically, transaction time is amongst the chief concern of prospective exchange users.

Storage

Storing your Bitcoin is typically done through the wallet offered by most Bitcoin exchanges. If a site does not offer a wallet, or you do not want to use a Bitcoin wallet, you can store your Bitcoin offline. Storing your Bitcoin offline is commonly referred to as cold storage. Before we get into what, exactly, cold storage is, we need to explain why you might want to take advantage of it.

The reason you might want to utilize cold storage is due to the ever-increasing incidence of hackers and hacking. Just like the money in your bank account, the money in your PayPal account, and just about any other type of money/value stored online, the BTC sitting in a wallet can be (and has been) hacked, or stolen. In order to avoid the potential for hacking, users can store their BTC offline. When you think of storing Bitcoin offline, you can think of it like putting files onto a flash drive or external hard drive. Once the Bitcoins are loaded onto your cold storage device and taken offline, they are literally unable to be hacked. In the same breath, if you were to lose or break your storage device, your Bitcoins will be gone forever.

There are a few different ways to cold store your Bitcoin. As was just mentioned, you can load your BTC to external devices that you can hold, store, and protect in whatever way you see fit. Something that is becoming increasingly commonplace as Bitcoin moves further into the mainstream is that Bitcoin exchanges are offering cold storage of BTC, in addition to offering a wallet. While you need to pay a fee in order for an exchange to cold store your funds, it is a preferred option for some folks who do not wish to store and protect their own BTC. When you think of cold storage and whether or not you will do it yourself or employ an exchange, think of it as choosing whether you would like to store cash in your house or in the vault of a bank. Naturally, storing cash is just a tad bit different (and more difficult) than storing BTC, but the idea behind it is the same.

Top Bitcoin Exchanges

Now that we have walked you through how Bitcoin exchanges function, how you can use them, and what using them involves, it is only right that we follow up by telling you a little bit about the exchanges that exist. The following will highlight some of the most popular Bitcoin exchanges as well as what makes them unique/worth checking out.

Coinbase

As far as Bitcoin exchanges are concerned, few are more widely respected and widely used than Coinbase. Coinbase has been in business for a number of years at this point, and is widely regarded as the best Bitcoin exchange on the market. Perhaps the biggest draw to Coinbase is the simplicity and familiarity of the site. Not only is setting up an account very easy, making use of Coinbase is straightforward too. If you have used PayPal or any other e-wallet, the chances are you will have absolutely no issues using Coinbase. As one of the biggest Bitcoin exchanges on the market right now, the fees you will find at Coinbase are a bit higher than what you might find at other sites.

Coinbase is a full service site that allows you to buy/sell Bitcoin, buy other cryptocurrencies, send money to other Bitcoin wallets, and receive money from other Bitcoin wallets. What’s more, they also offer cold storage of your coins in order to give you the most peace of mind. All things considered, Coinbase is the best of the best as far as Bitcoin exchanges are concerned.

Bitstamp

While Coinbase has much of the North American market, the European market has readily turned to Bitstamp as their preferred Bitcoin exchange. Bitstamp has a proven track record, has been in the industry for some time now, and is also quite easy to use. One of the top draws to Bitstamp is the ease with which you are able to create an account. By providing just a few personal details, you can have a new account—complete with a Bitcoin wallet—created in a matter of minutes.

Bitstamp prides itself in being one of the most transparent Bitcoin exchanges on the market today. Not only do they proudly boast the fact that their site is annually audited, they also boast about securely keeping all funds offline. In fact, 98% of all funds are stored offline, which is fairly unique and definitely not an industry standard. This is a very good thing.

CoinMama

CoinMama has been online since 2013, and as far as Bitcoin exchanges are concerned that is a very long time. Their claim to fame is, once again, a very easy to use interface coupled with fast transaction times. In fact, if you are attempting to purchase Bitcoin with a credit card, there are few sites that allow you to execute a purchase so quickly.

Unfortunately, CoinMama is a lot like Coinbase in that their massive popularity translates into somewhat high fees. Still, CoinMama allows a single user to purchase up to $5,000 in BTC at a time with a credit card. You will find almost no other sites that feature such high limits. Even despite their fees, CoinMama is a great site that is used the world over.

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