One of the hardest concepts to grasp for novice Bitcoin users is how and where they can buy their first digital currency. The answer to that question is relatively simple, as the most commonly used method is purchasing Bitcoin from a Bitcoin exchange. But what is a Bitcoin exchange exactly, and which one should you choose?
The Concept of a Bitcoin Exchange
A Bitcoin exchange is not all that different from your average stock market, as it is a platform which lets users intermittently buy and sell currencies and assets. For example, you want to buy bitcoin, and you have fiat currency at your disposal. Or you have some Dogecoin, which you want to exchange for Bitcoin. All of these things can be done by using an online exchange.
It has to be said however that not every Bitcoin exchange will let you buy and sell Bitcoin in exchange for fiat currency. There are specialized Bitcoin exchanges that will let you do exactly that – such as Bitstamp, Coinbase, Safello, Bitcoin.de, Huobi and BTCChina to name a few – but there is another breed of Bitcoin exchange out there.
Because the exchange from/to Bitcoin/fiat currency requires a specific license in most countries [a money transmitting license – which costs a lot of money and takes a few months to obtain] several Bitcoin exchanges will only allow users to trade Bitcoin against other digital currencies. For example, the Bittrex exchange will not let you trade any of their supported currencies against actual money, simply because the owners do not have the necessary license.
Bitcoin exchanges act as a middleman to conduct peer-to-peer transfers of digital currency. By creating an order book and matching buy & sell orders, Bitcoin exchanges are a platform on which people can trade without having to meet up with the buyer or seller in person. Everything is done automatically by the exchange platform, in exchange for a minor fee.
One of the main aspects of a Bitcoin exchange you need to understand is that Bitcoin – as well as other digital currencies – is a market driven by supply and demand. If you have been paying close attention to our What is Bitcoin? Guides, you may recall that Bitcoin has a finite supply, yet the demand is growing year by year.
Keeping that train of thought, you can see where Bitcoin’s price volatility comes from. And it is that volatility that is noticeable on Bitcoin exchanges as well. If there is a sudden spike in demand, the Bitcoin price will go up across the exchanges, and you will pay more money to buy a Bitcoin. On the other hand, is someone is selling off a large chunk of coins, prices go down, and you can buy Bitcoin at a cheaper price.
Which Exchange Is Best For Me?
Honestly, that question is rather hard to answer. There are a lot of Bitcoin exchanges to choose from, and it depends on what kind of service and customer experience you are looking for. Do you want to be able to buy and sell Bitcoin in exchange for fiat currency? Or are you just looking for a place to trade one digital currency against another?
A relatively complete list of Bitcoin exchanges can be found here.
The Verification Process
Before you venture into the world of Bitcoin exchanges, there is one final thing you need to know. Whenever you exchange fiat currency for Bitcoin and vice versa, the Bitcoin exchange of your choice will most likely require you to verify your identity. This is a common practice in the world of exchanges, and all users will need to comply with this rule.
Identity verification is a process that can take anywhere from a few days up to several days, depending on the exchange you use. In order to verify your identity, most exchanges will ask you to submit a copy of your ID card or passport, and provide a proof-of-residency by scanning a recent utility bill or credit card/bank statement.
We will do a side-by-side comparison of Bitcoin exchanges we used personally in one of our upcoming articles.
All images courtesy of DollarPhotoClub