Cryptocurrencies are not currently accepted or handled by mainstream banks. In order to buy, sell, trade or swap digital currencies, users need to go through online portals called exchanges.
Although they replace banks in the digital currency system, cryptocurrency exchanges actually function more like stock markets.
Fiat currency holders can take their money to any bank with the expectation that the bank will exchange it for any other currency of their choice at an official exchange rate. The exchange rates between fiat currencies are regulated and manipulated by government agencies and will, therefore, be the same from bank to bank. However, the fees involved in those transactions may vary depending on the bank, the amount of money being converted and other factors.
Cryptocurrencies are unregulated. This makes their values more fluid. Many digital currencies also have a limited number of coins currently in circulation, which may also influence supply, demand and cost. In an exchange, users can automatically and electronically negotiate the sale and purchase of cryptocurrencies in either other cryptocurrencies or fiat currencies.
For example, a buyer seeking to purchase Bitcoins with United States dollars might set up a bid in an exchange indicating that he or she is willing to pay up to $200 per Bitcoin and wants to purchase 100 coins. If they are available, then the exchange’s software will purchase 100 coins and transfer them to the buyer’s public key (aka digital bank account). It will purchase the lowest priced Bitcoins available first, then progressively work up the cost tier until it has purchased the desired number of coins or reached the buyer’s price cap.
Traditional banks generally require users to be established account holders before they are permitted to exchange large sums of money. Cryptocurrency exchanges can be accessed by anyone who downloads the necessary apps onto their digital devices. No personally identifying information is generally necessary. Individuals can use exchanges to monitor cryptocurrency fluctuations. Although a large number of exchanges exist, a few dominate the market.
Coinbase is a hybrid service that deals with Bitcoin, Bitcoin Cash, Ethereum and Litecoin. It not only serves as an exchange platform but also provides a digital wallet function and merchant services for entrepreneurs and businesses that want to handle their accounts payable and account receivables through cryptocurrency. Coinbase serves the United States and 18 European countries. Transactions can take up to five business days to clear.
Cryptsy allows users to exchange 200 different forms of digital currency. It hosts more than 300,000 exchanges every day and is in the process of launching merchant services features. Buyers pay a trading fee of 0.2 percent and sellers pay 0.3 percent per transaction.
Bitstamp is an extremely popular and well-run exchange based out of Slovenia. It handles a high trade volume and charges slightly higher transaction fees, but transactions are processed instantly and a full range of buying and selling tools are available.
The Bitfinex exchange platform is particularly attractive to users concerned about security. Exchange developers incorporated multi-layered safeguards into its design and operations, heavily insulating it against data loss, hacking and theft.
The Kraken exchange is specially designed for professional and experienced cryptocurrency traders. It provides many of the high-end tools stock traders would expect and rely on. Users can trade major cryptocurrencies such as Bitcoin, Namecoin and Ripple for Euros, United States dollars and South Korean Won.
BTCChina is among the oldest and highest volume cryptocurrency exchanges. It accommodates Bitcoin and Litecoin trades using Chinese, Hong Kong and United States fiat currencies.
It is important to consider which exchange to use, as some may only work with certain types of cryptocurrency such as Coinbase. Kraken, on the other hand, may be too complex for new investors testing the waters. Users may also use multiple exchanges.
Cryptocurrency exchanges offer users a wide variety of benefits and advantages. Unlike banks, nearly all cryptocurrency exchanges are available 24 hours a day, seven days a week. Transactions can be made and processed at any time from any location using digital apps downloaded onto a variety of devices. Users are free to select any exchange that trades in their currencies (digital and fiat) of choice, regardless of where they or the exchange(s) are operating. As noted above, many exchanges allow users to take advantage of pre-set limits and buying or selling contracts that can help them maximize the efficiency and profitability of their accounts.
Different exchanges invest in and emphasize different aspects of the exchange process. Bitfinex, for instance, is strongly dedicated to security. Kraken offers a comprehensive suite of business tools for professional traders. Cryptsy accommodates an extremely broad array of cryptocurrencies, providing one-stop-shopping for users managing multiple cryptocurrency investments or projects depending on an investor’s cryptocurrency investment strategy.
Cryptocurrency exchanges are not without their disadvantages. Chief among the potential downsides are the occasional mismatch between buyers and sellers, the risk of hackers and other loss and the threat of fraud.
Unlike government-regulated banks and fiat currencies, cryptocurrencies are strongly subject the whims of a volatile market. The demand, availability and pricing of cryptocurrencies can vary significantly from day to day, week to week or month to month. As a result, buyers may not always be able to purchase the type of cryptocurrency they want at prices they find acceptable on a particular exchange. Sellers, likewise, may not be able to get an exchange rate they are pleased with if demand is low. Participating in multiple exchanges or primarily dealing in exchanges that offer auto buying and selling tools can minimize these occurrences but will not completely prevent it. Users may also be limited in which exchanges they can use by the type(s) of fiat and cryptocurrencies they most commonly trade in.
In the event that the servers and systems managing exchange data are damaged or destroyed, all records of transactions associated with that exchange could be lost. Although this is rare, it has the potential to decimate the financial holdings of any consumers who have been using that exchange. Similarly, exchanges may be hacked. This, too, can wipe out any cryptocurrency assets exchange users held.
Finally, users must be careful to do their homework before selecting an exchange. Fraudulent exchanges are easy to set up and unscrupulous individuals and organizations can use them as fronts to gain access to users’ information and funds. However, due diligence prior to initiating transactions with an exchange is generally enough to prevent this.