Trading Bitcoins

You can now trade up to the amounts you have deposited. For example, if you have deposited USD 10,000, then you can buy up to $10,000 worth of cryptocurrency. If you have deposited 3 BTC then you can sell up to 3 BTC for fiat or other cryptocurrency that is available at that exchange. Prices are expressed in pairs that look something like this: BTC/USD or BTCUSD with a number such as 8,000. The way to read this is, ‘One unit of BTC costs 8,000 USD’. Not all currencies can be traded for each other - it is really up to the exchange as to which pairs they enable. For example you may see BTCUSD and BTCEUR as trading pairs, meaning that you can trade BTC with USD and trade BTC with EUR, but you may not trade USD with EUR directly if you don’t see EURUSD. In that case, to convert USD into EUR, you’d need to sell USD for BTC then use the BTC to buy EUR.

You will see a screen of other people’s bids and offers. These are the prices at which they are willing to trade, and how much they are willing to trade at that price. You can decide either to match their prices, which will result in a matched trade, or submit your own orders which will rest in the order book until someone matches your price (if they ever do). This is a financial market - this means that the larger amounts you want to buy or sell, the worse the prices will be. This is unlike a supermarket where you get a discount for buying in bulk. This is confusing for some people initially, but it is easily explained. When you buy something on an exchange, the exchange will naturally match you off with the person who is selling it at the cheapest price. When you’ve bought all that they have to offer, you have to find the next best price, which will be slightly higher. Selling uses the same logic: when you sell something, the exchange will match you with the person who is willing to pay the highest price for it. When you have sold as much to them as they want to buy, you will have to go to the next highest price which will be slightly lower.

Finally, you will want to withdraw fiat currency or cryptocurrency. To do so you have to instruct the exchange where you want it to go. If you are withdrawing fiat, you will need to tell the exchange your bank account details for them to make the transfer to you. If are withdrawing cryptocurrency, you need to tell the exchange your cryptocurrency address so that they can make the cryptocurrency transaction. Usually cryptocurrency withdrawals are faster for the exchange to process than fiat withdrawals because most exchanges have ‘hot wallets,’ as described earlier, which automate the process of sending small amounts of cryptocurrency back to users.

Exchanges make money by charging fees, just like your stock broker. Different exchanges charge different fees in different ways. Some charge withdrawal fees (e.g., if you withdraw $10,000, then they might send you $9,950, and you would receive even less than this because of bank fees).
Others charge by taking a small fraction of every trade you do, usually by reducing the amount of whatever you are receiving. For example, if you have $8,000 in your exchange account and use it to buy BTC at a price of $8,000 per BTC, then you will receive slightly less than 1 BTC, say 0.995
BTC. Trading fees are usually determined by how much trading you do, so if you trade more, the fee rate decreases according to a published fee schedule.

The price of any asset at a cryptocurrency exchange depends on the participants using the exchange. Different exchanges can have different prices for each cryptocurrency, because of the different participants using the exchange and the different levels of supply and demand on those exchanges. Usually the prices are within a few percent of each other. If they get too out of line, arbitrageurs step in and buy the bitcoins from the exchange where they are cheap and sell them where they are trading at a premium.

The extent to which arbitrageurs can keep doing this profitably affects how aligned the prices will ever become. To complete the circle of a successful arbitrage you need to move the fiat, and sometimes this will have costs and time delays. To buy bitcoins on the cheap exchange, you need to move fiat currency there, buy bitcoins, withdraw the bitcoins and send them to the more expensive exchange, then sell them, withdraw the fiat, and repeat the cycle. Each step has a financial cost and may not be instant. Some countries have currency controls, which hinder cross border exchange arbitrage. This is why there can be price differentials between exchanges for some time.

In late 2013-14, the exchange Mt Gox traded at a premium to its competitor Bitstamp, because people found they couldn’t withdraw fiat from Mt Gox, so instead they had to buy bitcoins and withdraw the bitcoins instead. This created artificial demand for bitcoins on Mt Gox, and the arbitrage of buying cheap bitcoins on Bitstamp and selling them on Mt Gox didn’t work because you couldn’t get your fiat out of Mt Gox. Cryptocurrency exchanges perform activities that may be regulated in their operational jurisdictions. The fact that the instruments involved are cryptocurrencies does not necessarily mean that the exchanges escape local trading and tax disclosure requirements. However, depending on how the legislation is written, and owing to regulatory uncertainty, the classification of cryptocurrencies, exchanges currently operate in a legal grey area, especially crypto-only exchanges who allow trades between cryptocurrencies but not fiat.