How does bitcoin exchange work | How Do Bitcoin and Crypto Work? | Get Started with

what is liquidity?

Liquidity refers to the ease with which you can trade in and out of an asset, and is highly dependent on the number of buyers and sellers (market participants) there are for an asset. Cash is often considered the most liquid asset as it is almost universally accepted. In other words, it’s easy to trade cash for just about anything you want. A car, on the other hand, is generally a less liquid asset than cash, since it takes some effort to find a buyer. meanwhile, a high-end collector car would be an even less liquid asset, as the pool of potential buyers is smaller.

Bitcoin is the most liquid of all cryptocurrencies, combining the largest number of market participants with the largest trading volume. daily bitcoin exchange is measured in the tens of billions of dollars! still, compared to cash, it’s not liquid, particularly when it comes to using it to buy something in the real world. for this reason, there is a need for bitcoin exchanges.

Reading: Wants bitcoin to work with exchanges

what is a bitcoin exchange?

A bitcoin exchange is any service that connects bitcoin buyers with sellers. exchanges are what make bitcoin a liquid asset for large-scale traders.

When most people talk about bitcoin exchanges, they are referring to centralized “custody” platforms like coinbase, kraken, and binance. These platforms make it easy to trade bitcoin and many other cryptocurrencies. Like stock trading platforms like robinhood and charles schwab, cryptocurrency exchanges match buyers and sellers.

critically, by definition, a centralized cryptocurrency exchange takes custody of your bitcoin. this has a number of implications related to security, but also related to the freedom you have to use your bitcoin as you wish.

read more: custodial versus non-custodial bitcoin wallets.

how do centralized bitcoin exchanges work?

From a user’s perspective, the typical flow is as follows:

  1. register with the exchange and present identity documents.
  2. fund your newly created account with bitcoin, another cryptocurrency or, if the exchange allows it, local currency.
  3. make a transaction by setting a ‘buy order’.

    See also: 9 Best Exchanges to Buy Crypto & Bitcoin in USA (2022)

    Buy and sell orders are aggregated into an “order book” maintained by the exchange in order to efficiently and automatically match buyers and sellers. most exchanges allow you to set ‘buy market’ orders and ‘buy limit’ orders. When you create a market buy order, you only need to indicate how much bitcoin you would like to buy (you do not set the price). the exchange will automatically match you with the seller(s) currently offering the lowest price and execute your trade. Market orders are generally filled instantly, which means that the moment you submit the order, you will receive your bitcoin in your wallet/exchange account. When you create a buy limit order, you indicate how much bitcoin you would like to buy and the price you are willing to pay for it. As long as there are sellers willing to accept the price you’ve set (your ‘limit’), your order will be fulfilled, meaning your bitcoin will appear in your exchange wallet and your money (or other cryptocurrency) will be gone.

    what is a bank exchange?

    Cryptocurrency exchanges that allow you to transfer local currency to and from them are known as “bank exchanges”. Some exchanges allow you to transfer local currency to start shopping (usually in the form of a credit card or payment app like PayPal), but do not allow you to withdraw local currency to your credit card or payment app. these are known as ‘partially banked’ exchanges. a fully banked exchange will allow you to fund your account via wire transfer and send local currency to your bank account.

    what are creators and takers?

    Generally speaking, the more users an exchange has, the more “market depth” it can provide. Market depth refers to the size of the exchange’s order books. People who place buy and sell orders on exchanges are known as market makers. The more orders there are on the book, the easier it is for people to buy and sell large amounts of bitcoin at a rate closer to the global market. In markets, takers are those who reduce liquidity by taking orders that are already on the books. when you place a market order, you are a taker. You can also be a taker when placing a limit order if your order matches someone else’s order that is already on the books.

    how do centralized bitcoin exchanges make money?

    in a word: fees. these may include some or all of the following:

    • withdrawal fees

      Most exchanges charge a fee to withdraw bitcoin, other cryptocurrencies and local currencies. in most cases, the fee is per withdrawal (not a percentage of the withdrawal amount). Withdrawal fees charged by exchanges tend to change frequently, often without notice.

      commercial commissions

      They are usually calculated as a percentage of the commercial value and often depend on whether you are the creator or the recipient (see above for an explanation of creators and recipients). In most cases, creators pay lower fees than buyers. the reason for the discrepancy is that creators provide liquidity (and therefore should receive a discount), while buyers remove liquidity (and therefore should be charged an additional fee).

      See also: Come Investire 100 Euro: 10 Opportunità Da Non Farsi Scappare

      interest/loan/settlement rates

      some exchanges offer margin trading. this is where you borrow to increase your position, creating what is known as leverage. Exchanges that offer margin trading typically charge additional fees based on the amount borrowed and an interest rate determined by the total supply of funds available to all traders. you may also be charged an additional fee if your position is liquidated.

      why do i have to verify my id to use a centralized bitcoin exchange?

      Taking custody of customers’ bitcoins and other cryptocurrencies, as centralized exchanges must, has legal implications. specifically, such exchanges are subject to the money transmitter laws in the jurisdiction in which they are legally registered.

      For this reason, most centralized cryptocurrency exchanges require you to complete a registration process where you must verify your identity before you can use the platform. Regulators impose this requirement on exchanges ostensibly to prevent money laundering, terrorist financing, and tax evasion. regulators also often require exchanges to report client information (including trading history) upon request.

      In many cases, you will be allowed to start using the exchange by verifying your email only. It’s important to note that this “light verification” usually comes with considerable restrictions including limited purchase amounts, limited withdrawals, and in some cases, no withdrawals at all. Before funding a cryptocurrency exchange with bitcoin or any other cryptocurrency, be sure to verify that you will be allowed to make withdrawals.

      The next level of verification typically involves uploading a nationally issued ID, such as a passport or driver’s license. In some cases, you will be asked to upload a photo of yourself holding your ID next to a piece of paper on which you have written, for example, the current date and a specific message as requested by the exchange.

      Please note that many exchanges exclude certain nationalities from using the exchange altogether.

      how does peer to peer bitcoin exchange work?

      A number of matchmaking platforms have sprung up to (1) help bitcoin buyers and sellers find each other and (2) facilitate trades (usually using escrow) without actually taking custody of bitcoin from the merchants. these are known as peer-to-peer bitcoin trading platforms.

      Peer-to-peer bitcoin exchanges can be an efficient way to buy and sell bitcoin, but since you have to trade transactions individually, they come with a certain level of drawbacks. For buyers, it can be difficult to quickly obtain the exact amount of bitcoins they would like to buy and obtain them at competitive market prices. sellers, meanwhile, may face legal implications depending on their jurisdiction and the volume of bitcoin involved. these factors combine to make most peer-to-peer bitcoin exchanges considerably less liquid than most centralized (custodial) cryptocurrency exchanges.

      See also: Travel Rule Crypto in Japan by FSA 🇯🇵 [2021] – Notabene

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