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What is a Cryptocurrency Exchange?

By: David Marc
Updated: June 1, 2018

Are you thinking about buying bitcoin or some other digital currency?  If so, you will most likely need to set up an account at a bitcoin exchange!  A bitcoin exchange is a market for the buying, selling, and trading of bitcoin and other digital currencies.  Most exchanges offer trading between fiat currencies – like dollars, euros, or pounds – and bitcoin or other large cryptocurrencies.  Other specialized exchanges offer the trading of bitcoin against hundreds of other digital assets. Lost you already? Don’t worry, after reading through a few of our exchange articles you will be ready to take the plunge and buy your first bitcoin!

First, let’s take a look at the two different types of marketplaces to buy and sell cryptocurrencies.  

Bitcoin Exchanges and Bitcoin Brokerages

Brokerages

Think of a brokerage as being like a store which sells bitcoin or other cryptocurrencies.  Like a brick and mortar store, the prices will need to be relatively similar to the competition if there is any hope of attracting repeat customers; however, at the end of the day it is the broker that sets the prices.   

Customers will usually find working with a brokerage very convenient.  Brokerages work to make the buying and selling process simple, and more lax regulations might make the sign up process a bit easier too.  Some brokers cater their offer to a specific customer type – for instance, one brokerage might target customers looking to buy bitcoin with a credit card, another might target customers looking for more obscure cryptocurrencies.  

As a rule, although not always, buying from a brokerage will be more expensive than buying from an exchange due to higher transaction fees, as well as any additional amount the broker sets in the price.   

Exchanges

If brokerages are retail shops, bitcoin exchanges would be more like a trading arena.  Buyers and sellers are matched against one another on a trading platform, with the exchange itself taking a small fee against the trades made.  Exchanges often offer a more robust trading experience – with different order types, tools, and advanced features – though it might seem a bit overwhelming for a new trader.  

In order for an exchange to properly function, it must reach a critical mass of trading volume, otherwise there will be nobody around to fill orders!  Luckily, the massive growth of the bitcoin marketplace has been accompanied by the growth of some massive exchanges as well, with enough trading volume to ensure orders get filled in any market condition.  

Tips when opening a bitcoin exchange account

If you are considering opening an exchange account, there are a few things to take into account.  

  1. Don’t procrastinate! When the market heats up demand for new accounts is so massive at exchanges that they have a difficulty processing new applications.  It is highly recommended to go through the account opening process as quickly as possible to avoid disappointment down the road.
  2. Get your identification materials together.   If you are opening an account at an exchange, make sure you have a valid, government-issued ID and a proof of address document.  For proof of address, exchanges will always ask for some sort of bill with your name on it, dated within the last three months.

If your name is not on a bill, or you get bills in a language not supported by the exchange, ask your bank to email you a signed English letter confirming you are an account holder and documents your address.  This will generally be accepted.

       3. Work on building your account limits from the start! It is very frustrating to be unable to deposit or withdraw your desired amount due to insufficient account limits.  Exchanges will often request additional steps to raise initial low limits. It is worthwhile to get these steps out of the way as quickly as possible – whether that means adding a bank account, setting up two factor authentication, making a small deposit, or fulfilling some additional verification step.

If you think you are ready to get into bitcoin, check out our article on picking the right bitcoin exchange, or have a look at our take on the best bitcoin exchanges of 2018.