02/16/2018

The Ultimate Guide to Digital Exchanges

Introduction
A digital exchange allows users to purchase and exchange digital currencies. Some exchanges allow users buy and sell cryptocurrency to each other, some allow users to buy and sell tokens and fiat currencies from the exchange itself, and some strictly deal with digital currency exchange, often with advanced trading features like margin and futures. 

Types of exchanges

  • Peer-to-Peer: A platform allowing users to exchange digital currencies with other users. The exchange itself does not hold onto any currency but facilitates trades between users, ex. www.localbitcoins.com
  • Fiat-to-Digital: A platform allowing users to buy and sell digital currencies for fiat currency or other digital currencies, ex. www.coinbase.com
  • Digital: A platform allowing users to exclusively exchange cryptocurrencies, ex. www.bittrex.com

Security features to consider
The first rule when dealing with digital currencies is that you are solely responsible for the security of any money you store online. Always store your password in a safe location and make sure to use a strong password containing letters, numbers, and symbols. Many exchange, online wallets, and cryptocurrency users have suffered from security breaches resulting in the loss of significant assets so skepticism toward exchanges and wallet providers is highly recommended.

In addition to a secure password, two-factor authentication using an application like the Google Authenticator App rather than receiving a code via SMS is recommended. Exchanges are intended for use as an exchange and for daily trading so use your own digital wallets for long-term storage.

Questions to ask when choosing an exchange
Do users purchase digital assets directly from the platform, exchange IOU’s using a market-clearing mechanism that allows withdrawals, or from other users via the platform? Is this a reputable exchange? Does the exchange provide my desired functions? Am I legally allowed to exchange digital currencies based on the laws where I live?

Trading on an exchange
As an example we will use the platform provided by Bittrex at www.bittrex.com. Once you have created an account, hopefully set up two-factor authentication, and funded your account you can navigate between bitcoin and USDtether trading pairs at the top of the screen. The following example displays charts and information for the BTC-BCC trading pair trading Bitcoin and Bitcoin Cash, including the current BCC price in bitcoin and USD, the 24-hour volume, current bid, ask, and 24-hour high and low spot prices.

Bittrex

If we scroll down from there we find the actual exchange functions for buying Bitcoin Cash on the left and selling it on the right and below that the order book containing the most current bids to buy BCC and the asks for those wanting to sell you BCC. 

Bittrex Order

To buy BCC, enter the amount of BTC you would like to spend in the row marked “Total” on the left side. Then use the drop-down menu marked “Price” in the “Bid” row and select the “Ask.” The lowest rate at which you can currently buy BCC will be displayed in the “Bid” row and the amount you can buy will be in the row marked “Units.” As they say, you want to buy low and sell high. 

If you select a “Good Til Cancelled” order and the amount of units you intend to purchase exceeds the amount displayed in the “Size” column under “Asks” in the order book then your order will remain on the order book until a large enough lot of BCC becomes available at or below the requested price. If you select a “Fill or Kill” order the order will not remain on the books if it can’t be immediately fulfilled.

To sell BCC, enter the amount of BTC you would like to spend in the row marked “Units” on the right side. Then use the drop-down menu marked “Price” in the “Ask” row and select the “Bid.” The highest rate at which you can currently sell BCC will be displayed in the “Ask” row and the amount of BTC you can receive will be in the row marked “Units.” Again, if the amount of units you intend to sell exceeds the amount displayed in the “Size” column under “Bids” in the order book then your order will not be immediately filled. 

If you would like to see your order filled then search for a Bid whose size exceeds the amount of BCC you wish to sell; multiple bids can be used to fill an order so if the size of the first few orders exceeds the order you wish to make then as long as you place the order at the lowest bid before any other orders are entered you will have your order filled. 

Advanced features and other considerations
Some exchanges offer margin trading, futures, and other features designed to enhance the trading experience for more advanced users. We recommend developing a solid understanding of trading and investment before making use of these features. Be aware of the tax implications incurred by trading in your jurisdiction and the inherent risks of investing in general. Using an exchange can be intimidating for new users so practice making trades with small amounts of currency until you are comfortable using the platform of your choice.

Authored by

Seth Goldfarb

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