Exchanges are a vital part of the Bitcoin ecosystem, allowing customers to buy and sell Bitcoins in return for physical currencies such as dollars, Euros and pounds, as well as other cryptocurrencies such as Litecoin, Dogecoin and others. They therefore provide a bridge between the traditional and Bitcoin economies, as well as opening up a wide range of trading opportunities for their users.
Although there are other ways of obtaining Bitcoins, exchanges are the easiest way of doing this. Bitcoin mining is only suitable for experts, and few people currently have the option of earning Bitcoins. Well-run exchanges represent a straightforward and safe way of buying and selling coins, and in some cases, storing them too. However, the recent failure of MtGox and other Bitcoin companies due to poor security and management issues has led customers to question the level of confidence they can have in unregulated exchanges. For this reason it is vital to work with professionally-run exchanges with a commitment to transparency and strong security.
Getting Started with Exchanges
Signing up with an exchange is usually a simple matter of providing an email address and password. After replying to a confirmation email you can start to use your account immediately. Bitcoin deposits are usually free and fast; most exchanges require six confirmations before crediting your account. Depositing a small quantity of Bitcoins, if you have them, is a good way to learn how an exchange works and to experiment with different functions.
To fund your account with fiat currencies or to withdraw funds to a bank account, you will need to verify your identity. This is because the exchanges are subject to anti money-laundering (AML) legislation and need to be able to demonstrate that they have taken steps to check their users are who they say they are. This is generally done by sending scanned copies of two forms of identification – one form of photographic id such as a passport, and one form of proof of address. This process usually takes between one day and two weeks, assuming all goes well.
Once your account is verified you can fund it from your bank account. It will usually take between a day and a week for the money to clear and there may be a charge for this service, depending on your banking arrangements. You will also be subject to the banks’ own exchange rates, which might be more expensive than the standard rate. The same is true of withdrawing money.
Major Bitcoin Exchanges
There are a large number of bitcoin and other cryptocurrency exchanges, which operate in countries around the world. These each trade in different currencies and offer different features, providing services that will appeal to a range of customers depending on their specific needs. As well as exchanging physical currencies and cryptocurrencies, these often include various different trading tools, as well as other services. The value of Bitcoin is different on every exchange. The decision to use a particular exchange may be motivated by a number factors, including:
· Where it is based and its main physical currency
· Its reputation
· Any trading tools and other services provided
· The level of customer service and support it offers
Some of the best-established and well-known bitcoin exchanges include:
Bitsource is a relatively new entrant to the bitcoin exchange market. Based in Belize, it currently offers trading between pairs of Bitcoin, Litecoin and USD.
"Our goal was to simplify the process of acquiring and selling crypto-currencies for the average person interested in jumping into Bitcoins and other currencies of that nature," said Michael Carter, CTO of DCE24 Group Ltd., and BitSource. "The process really needed to become easier and more intuitive in order to become more mainstream, and I believe we are accomplishing just that with BitSource.org,"
Bitsource is designed to appeal to newcomers to bitcoin, aiming to make the process as simple and fast as possible to those as yet unfamiliar with cryptocurrencies. The site employs a straightforward user interface, and the company has also taken the unusual step of enabling Visa and Mastercard transactions to make the exchange more attractive to everyday customers. Up to 98% of funds are held in cold wallets and offline in bank accounts to improve security and reduce the likelihood of theft. Their customer service department is available 24/7 to help users buy and sell digital currencies, and the company has a commitment to fast execution of trades and withdrawal of funds.
Bitsource.org officially announced on May 5th, 2014 that they are starting to accept Creditcards.
Bitstamp is currently the largest bitcoin exchange in the world by volume. It is based in Europe, with its headquarters in the UK and its banking in Slovenia. Its CEO is Nejc Kodrič, who is a well-known and active member of the bitcoin community.
Bitstamp allows customers to fund their accounts from an international or SEPA (European) account, as well as by Ripple and AstroPay. Withdrawals are to your verified bank account or by Ripple. Bank transfers incur a small fee, as well as any fee from your bank itself. Bitcoin transfers are free.
Bitstamp currently only offers trading between bitcoin and USD, although you can fund your account in Euros (these are automatically converted to dollars). As well as buying and selling at the spot price, it also enables you to place limit orders so that you can trade when the price hits a certain threshold. Advanced limit orders allow you to open a second order automatically once the first has been fulfilled.
Overall, Bitstamp is an extremely professional and well-run exchange. It was recently audited by a third party to ensure that all of the bitcoin and fiat funds were accounted for, passing without incident. They have recently attracted $10 million of funding from hedge fund Pantera Capital Management.
Coinbase is the largest US-based exchange. Rather than being a true exchange, which works by matching buyers and sellers, customers buy and sell bitcoins from Coinbase itself. However, the net result is much the same and, like Bitstamp, the volume is such that customers can be assured of competitive prices. Coinbase do not offer limit orders or other trading tools.
As well as offering the ability to buy bitcoins, Coinbase provide a wallet service so that customers can store their bitcoins safely. They also provide a range of merchant tools, so that businesses can integrate bitcoin payments into their websites as easily as possible. Rather than focus solely on the exchange aspect of their business, Coinbase aim to become a one-stop-shop for all of their customers’ bitcoin needs. For this reason they have become known as the ‘PayPal of bitcoin’ and have an excellent reputation.
Coinbase is another large and well-run organisation, which has seen a huge increase in users over the last year. They now have over 1 million customer accounts, and have attracted $31 million in venture capital funding.
BTC-e is another large and popular bitcoin exchange that operates in Eastern Europe. It offers customers the ability to make deposits in dollars and Euros via a number of different means (rouble deposits were stopped after the Russian government banned bitcoin, though the exchange is still popular in Russia). It also offers trading in Litecoin, Namecoin and a range of other cryptocurrencies, and gives users access to various trading tools.
However, BTE-e operates as an anonymous exchange. The identity of its CEO is unknown, and it is not even known for sure which country it is based in. Although it appears to be located in Bulgaria, some critics have suggested that it is really based in Russia. If this was the case it would be subject to immediate closure if the Russian authorities discovered it. These factors mean that many users and bitcoin experts are wary, since they have little or no comeback in the event of bankruptcy or other problems with the exchange. For the same reason, it is popular in Russia, where citizens are not officially allowed to buy and sell bitcoins.
Whereas most exchanges provide a way for customers to trade between physical money and cryptocurrencies, Cryptsy aims to provide a comprehensive service for trading between different types of cryptocurrency alone. The exchange is based in Florida and has established itself as the foremost way to trade between pairs of over 100 cryptocurrencies, including bitcoins.
Cryptsy plans to expand its services in the near future to include USD deposits. However, this will require a degree of scrutiny and potentially regulatory approval at some point. It also plans to add cryptocurrency escrow to the site for safe and direct user-to-user transactions.
Kraken is another large and well-run trading platform that aims to create ‘a new standard for secure, feature-rich bitcoin trading’. Billing itself as a cross between Forex and a bitcoin exchange, Kraken offers a number of advanced trading tools and solid security. Based in California, the site promises fast deposits/withdrawals and excellent support. Customers can trade between pairs of several different physical and ‘math-based’ currencies, including bitcoin, Litecoin, Namecoin and Ripple.
Kraken has just passed a ‘proof of reserves’ audit and has recently attracted $5 million of venture capital funding. The Proof of Reserves was a huge step in auditing the Bitcoin Exchanges. Here is the Article.
The rise and fall of MtGox
MtGox was the first and once the largest bitcoin exchange. Based in Japan, the site was originally created as a trading platform for Magic: the Gathering cards. It was reinvented as a bitcoin exchange in the cryptocurrency’s early days, and soon established itself as a popular site among bitcoin enthusiasts.
Although a pioneer in bitcoin’s history, MtGox suffered a series of hacks and other security incidents. In 2013 users experienced long delays in withdrawing their money. This led to people using the exchange to deposit funds and withdraw them as bitcoins, which artificially raised demand and led to increased prices. At the beginning of 2014, MtGox revealed that a vulnerability in their wallet software had led to the loss or theft of 850,000 bitcoins, worth around $450 million at the time. The company filed for bankruptcy. In March, MtGox claimed to have found 200,000 bitcoins in forgotten wallets. The case is ongoing, with former customers uncertain whether they will receive any compensation. It is possible that the exchange will relaunch at some point in the future.
Using trusted exchanges
The problems experienced by MtGox were a wake-up call for the other major exchanges, which immediately sought to implement increased security features and conduct audits to ensure that they held all of their customers’ bitcoins and physical funds. It also prompted governments to rethink regulation around bitcoin companies and other areas of policy. For users, MtGox highlighted the problems inherent in trusting a company that was not subject to the same laws as banks and other financial institutions.
Due to the potential risks of trading on unregulated exchanges, customers should only use those with a history of transparency and excellent security. Exchanges that have attracted VC funding will have been subject to a thorough audit to ensure they represent a viable investment. You should also make sure that you know where an exchange operates and whether they carry out security checks on their employees.
Exchanges and wallet security
With the exception of Coinbase, most exchanges do not offer a separate wallet service. This can make them potentially vulnerable to loss or theft of bitcoins and physical currency through hacking or poor practices. Although most exchanges are professionally run and generally very safe, it is still generally considered safest not to leave funds on an exchange any longer than strictly necessary. Fiat money should be withdrawn to your bank account. Bitcoins can be withdrawn quickly and easily to a dedicated wallet service, or to cold storage. Ideally, you should use an exchange only as an exchange.
There are a large number of exchanges operating in countries around the world – the US (Coinbase, Cryptsy, Kraken), Central America (Belize), Europe (Bitstamp, BTC-e and others). These offer the easiest way to buy and sell bitcoins and other cryptocurrencies in return for physical currencies. Some will offer other services, including wallets for cryptocurrency storage, and advanced trading tools.
In all cases, security and reputation should be a priority for customers. Since MtGox announced its bankruptcy, most exchanges have reviewed their processes and are keen to win back customers’ confidence. Exchanges that do not offer transparency or solid customer service should be viewed with a degree of caution. Additionally, neither fiat money nor Bitcoins should be kept on these exchanges for longer than necessary.