Bitcoin currency exchange works in the same way you’re used to managing currency exchanges with national banks. You have X amount of a certain currency and you can exchange it for Y amount of another currency using a currency exchange centre. You can make bitcoin currency exchanges using bitcoin wallets that support this functionality or you can make use of one of one of the innumerable worldwide exchange sources geared for bitcoin currency exchange.
If someone wants to sell bitcoin, they would make a deposit to the exchange using the exchange’s bitcoin address. This user then has X amount of bitcoin within the exchange that is still linked to the user. This positive balance can then be used to exchange for the current exchangeable amount in a national currency or another cryptocurrency.
Similarly, if a user wants to buy bitcoin using a national currency, they would make a deposit to the exchange in their currency and then use that positive balance to buy bitcoin from whoever is selling at the current rate of exchange.
Using one of the number of exchanges available, users can make a currency exchange from bitcoin into one of the major supported currencies. The most accepted forms of payment to and from an exchange are:
- Credit card
- Debit card
- Bank wires or transfers
- Bitcoin transfers
There are slight differences to each exchange, but generally speaking they support the same functions. With most of the major exchanges you will find that there are two ways of placing a request to make an exchange, limit orders and market orders.
- Limit orders – when a user wants to buy or sell bitcoin at a price that’s no match for current value (ie: buying at a rate lower than current or selling at a rate higher than current), they will place a limit order on the exchange and when it can be fulfilled, the exchange will be executed
- Market orders – when a user wants to buy or sell bitcoin at the current rate, they place a market order and it will be fulfilled according to the closest match
To help make a little more sense of this, let’s say we have Trader A and Trader B and they both want to sell their bitcoins. For the purposes of this example, let’s assume bitcoin is really cheap and trading at $120 / BTC.
- Trader A places a limit order to sell for $150
- Trader B places a limit order to sell for $125
Trader C comes along and wants to buy bitcoin by placing a market order, which means they will receive the closest match to the current rate of $120 / BTC. The exchange will search for the closest match to Trader C’s market order, which would be Trader B’s limit order for $125.
As Trader C wants to invest more in bitcoin, the lowest price matches are continually matched to the market order and they thus start to sell out, which is what makes the price of bitcoin start to rise.
Security With Bitcoin Currency Exchange
While the blockchain has never been hacked and probably never will be, there are a lot of businesses operating outside the blockchain offering supporting services that have been. It’s important to do your homework before deciding on which currency exchange provider to use. There are reputable services offered almost in every country so it’s wise to either look up your local, preferred bitcoin exchange, or to use one of the more popular and noteworthy services.
Using the bigger, more established bitcoin exchange services will help protect you and your investment.