Comments like “Bitcoin UP 100%!” are popular in bull runs. It’s hard to miss out on the benefits of a price spike, but buying Bitcoin can seem confusing because it’s not common knowledge. This sentiment is what you call FOMO: Fear of Missing Out. We will explain how buying and selling crypto works if you don’t want to miss out.
Unless one is a miner, the easiest way to purchase Bitcoin or other cryptocurrencies is through an exchange. An exchange is a platform that runs on top of the crypto asset’s system. Through an exchange, crypto investors are connected with one another and transactions are made possible. In an exchange, users can buy or sell different cryptocurrencies at prices dictated by the law of supply and demand.
Figure 11 - Exchanges allow fiat to crypto transactions and vice-versa, as well as the crypto to crypto trades
Think of exchange as an old-school marketplace, where the stall owners each sell their unique goods. (old-school marketplace can be referred to barter markets of the 11th century or something) . The reason that the goods sold are unique, is because each stall owner grows or produces their own particular good -- similar to the way in which miners produce their own bitcoin. The best thing about this marketplace is that the stall owners can resell their unique goods to other market participants.
Exchanges shouldn’t be considered as peer-to-peer exchanges per se because even though one might be buying someone’s crypto, the transaction is executed with aid of a middleman: exchanges.
Figure 12 - Exchanges intake all different cryptocurrencies and generate a marketplace for trading
Binance, Kraken, Coinbase, and Bitfinex are the major players in the crypto community. Each of these exchanges offers various solutions to different crypto enthusiasts. One may be a better fit than another, but it all depends on one’s objectives. In the simplest terms, exchanges are portals used to buy and sell crypto assets and currencies.
It may be hard to decide which is the best exchange given specific objectives because most of them offer similar features:
2. What to look for when deciding what exchange to use?
Simplicity is key. Crypto is complicated enough, so it’s best to look for the easiest and most appealing exchanges. If the exchange layout is confusing, how can one transact freely? How can someone select the best investment if buying is such a tedious task?
A suggestion would be to play around with different options. The most comfortable exchange is the one to consider. The process of buying and selling crypto shouldn’t be a hassle. It should be thrilling and exciting.
Bitcoin is currently around $11,000, for most, a lot of money. Thankfully, exchanges allow users to purchase fractions of Bitcoin because Bitcoin is divisible by 100,000,000! Meaning that it’s possible to purchase 0.00000001 Bitcoin. Exchanges may establish a minimum of bitcoin to be bought because one satoshi can be inefficient and unprofitable for the exchange. Coinbase, for example, has a minimum purchase order of $2 worth of bitcoin. Due to bitcoin’s divisibility anyone can have access to bitcoin, as compared to major equity brokers that do not allow fractional purchases.
Most exchanges accept a variety of payment options. One can fund the account by transferring Bitcoin or other pre-owned cryptocurrencies. Linking the exchange account to a bank account may be the best for large deposits and withdrawals—this way, the account is funded via a bank transfer. For first-timers, it might be easiest to fund the account by linking a credit or debit card to the exchange.
Funding the account via credit/debit card is faster than a bank transfer. This premium quality might have a higher cost. So, it’s always worth reconsidering the different payment methods offered by each exchange.
Figure 13 - Depending on the exchange, it might accept wire transfers, crypto, or fiat as a payment method
Exchanges may offer different fees depending on the features and services provided. Some may charge deposit or withdrawal fees. Others charge for premium features. But, all exchanges charge a fee for each transaction. Similar to comparing fees when deciding on the payment method, comparing different exchanges and fees is crucial. It’s important to know which exchange to choose because if the account’s balance is not large enough, the fees amount to high costs that deflate profits.
Usually, the most user-friendly exchanges offer a limited amount of crypto assets to select from. They mainly offer the most popular cryptocurrencies. It’s a great place to start. There are hundreds of potential crypto investments, but for those who are risk-averse, it’s best to get acquainted with the crypto universe before diving into the deep.
For those who crave risk, the best exchange is the one with the largest set of cryptocurrencies, crypto assets, and currencies. Currently, More than 5,000 cryptocurrencies are circulating the market to this day. The more options the merrier, however, fees may increase as more opportunities are offered by the exchange.
Figure 14 - There are over 300 exchanges from where to choose from
There is no standard Bitcoin price in the market. Depending on the exchange in use, Bitcoin may be cheaper or more expensive (based on the exchange’s business model). Comparing the options’ price to the “average” Bitcoin price is the best way to ensure one gets a fair rate.
Millions of dollars have been lost due to exchange hacks. Binance, one of the biggest exchanges in the market, lost 40 million dollars because of a hack in 2019. Blockchain is immune to hacks or manipulation, but exchanges are not. An exchange is a platform that runs on the top layer of blockchain technology. If the platform is hacked, it doesn’t necessarily mean that Bitcoin was hacked. It means that a large depositary custodian, or the exchange, has lost a lot of money that belonged to its users.
When choosing between exchanges, it’s fundamental to look for related news. Has the exchange been hacked? If it was, were crypto investors reimbursed? Were security measures increased to prevent future hacks? The popularity of the exchange is a great way to determine if it’s safe. The more active traders the exchange has, the more secure it is. Be wary of fake or fraudulent exchanges. They won’t hesitate to take scam crypto investors. CoinFlux, a Romanian exchange, admitted to participating in laundering 1.8 million dollars online.
Management Team and Angel Investors
Getting an idea of the team running the exchange is the best way to get a hint of where the project is going. If the team behind the exchange is experienced and they have received funding to create and secure the exchange, it’s a great sign of future progress. Most of the time, management will follow the desires of their angel investors. Successful investors are always looking to mitigate risk. So, it’s a good sign that the exchange is compliant with new guidelines and regulations. On the contrary, savings are at stake.
Most exchanges are not limited geographically. They are intended for use all around the world. One can be geographically limited if Bitcoin is not pre-owned. Creating the account in the exchange is not the problem, funding the account is, because specific national credentials are required. For instance, the exchange may not accept a credit card because it doesn’t support payments from a specific country.
A study investigated the 100 most popular crypto exchanges and found out how its traffic is distributed by countries.
Figure 15 - Top 20 countries in the world with the most amount of crypto traders
If an exchange that offers popular cryptocurrencies, in a secure and relatively cheap market, but is incapable of receiving funds by cash, bank transfer, or credit/debit card from; it’s best to transfer some Bitcoin from pre-existing wallets and avoid the geographical speed bump. It’s always a good idea to store crypto assets in different wallets to diversify and reduce risk. But more on wallets later.
3. The Optimum Exchange
The optimum exchange may vary between users. The best fit depends on profit objectives, risk tolerance, and feature preference. Be sure to try the exchange before funding the account. User-friendliness, diverse payment methods, low fees, fair exchange rates, and a prestigious reputation are a must when choosing the right exchange.
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List of References
Bitcoin’s Blockchain Components, page 17
Transaction Time per Cryptocurrency, page 15
Exchange Fees, page 19
Exchanges, page 17
Exchange transactions, page 18
Crypto payment methods, page 20
Geographical constraints, page 21