A Bitcoin exchange is a digital marketplace where traders can buy and sell Bitcoins using different fiat currencies or altcoins. A Bitcoin currency exchange is an online platform that acts as an intermediary between buyers and sellers of the cryptocurrency.
Understanding Bitcoin Exchanges
Bitcoin exchange platforms match buyers with sellers. Like a traditional stock exchange, traders can opt to buy and sell Bitcoin by inputting either a market order or a limit order. When a market order is selected, the trader is authorizing the exchange to trade the coins for the best available price in the online marketplace. With a limit order set, the trader directs the exchange to trade coins for a price below the current ask or above the current bid, depending on whether they are buying or selling.
To transact in Bitcoin on an exchange, a user has to register with the exchange and go through a series of verification processes to authenticate their identity. Once the authentication is successful, an account is opened for the user who then has to transfer funds into this account before they can buy coins.
Different exchanges have different payment methods that can be used for depositing funds including bank wires, direct bank transfers, credit or debit cards, bank drafts, money orders and even gift cards. A trader who would like to withdraw money from the account could do so using the options provided by their exchange, which could include a bank transfer, PayPal transfer, check mailing, cash delivery, bank wire, or credit card transfer.
How Does a Bitcoin Exchange Work?
For example, on a Bitcoin exchange, three coin sellers are asking for BTC/USD 2,265.75, BTC/USD 2,269.55, and BTC/USD 2,270.00. A trader who initiates a market order to buy Bitcoins will have their order filled at the best ask price of $2,265.75. If only five Bitcoins are available for the best ask and 10 coins are available for $2,269.55, and the trader wants to buy 10 at market price, the trader’s order will be filled with 5 coins @ $2,265.75 and the remaining 5 at $2,269.55.
However, a trader who thinks they can get bitcoins for a better price could set a limit order for, say, $2,260.10. If a seller matches their ask price with this order or sets a price below this figure, the order will get filled. All of this is done by the exchange, which takes a percentage of each transaction for their business.