Buying and Selling Bitcoins

You can buy bitcoins from anyone who has them. Likewise you can sell bitcoins to anyone who wants them. Fortunately, there are various places where you are likely to find a group of people willing to trade at competitive prices - exchanges. Just like stock exchanges, Bitcoin or cryptocurrency exchanges are places (usually websites) that attract traders. However, you don’t buy bitcoins from the exchange itself. Just like a stock exchange, where you buy shares from another user of the exchange rather than from the exchange itself, a cryptocurrency exchange is the website that allows people to buy and sell between themselves. The exchange itself is just the location that brings together buyers and sellers, and people go there because they know they are likely to get the best prices there.

In financial services jargon, the exchange is an order matching engine. It matches buyers and sellers. It also acts as the central clearing counterparty. All matched trades appear to be against the exchange rather than between the customers directly, providing anonymity for customers. Finally, the exchange is the cash and asset custodian. It controls customers’ fiat money in its bank account and cryptocurrencies in its wallet.

Exchanges are based in different countries and support different fiat currencies and different cryptocurrencies. They all work roughly the same way using the same four steps: create account, deposit, trade, withdraw. To use an exchange, just like a bank, you need to open an account.
Exchanges are coming under increasing regulatory scrutiny due to the fact that they process large amounts of money. The top cryptocurrency exchanges match billions of dollars of buys and sells per day. Most legitimate exchanges follow a similar account opening procedure to banks, where new customers submit details and evidence of their identity, for example passport and utility bills. The documentation needed may become more onerous in proportion to the value of fiat or
cryptocurrencies you plan to transact, in a progressive risk-based approach. Exchanges are now big business and take these processes seriously. Once the exchange is satisfied, your account is created. Then you can log in and the next step is to deposit.

Before you can attempt to buy or sell anything on an exchange, you need to fund your account. This is like funding an account with a traditional broker before being allowed to buy traditional financial assets. Exchanges have bank accounts and cryptocurrency wallets. In order to fund your account you click on ‘Deposit’, then follow the instructions. If you are funding your account with fiat currency (presumably in order to buy cryptocurrency), then the exchange will display a bank account for you to make a fiat currency transfer to. If you are funding your account with cryptocurrency, (presumably to sell for fiat currency or trade for a different cryptocurrency) then the exchange will display a cryptocurrency address for you to make a cryptocurrency transfer to. Once exchange has detected the transfer to their bank account or cryptocurrency address, the balance will be reflected in your ‘account balance’ on the exchange’s website, and you are ready to trade.