A bitcoin exchange is an online platform that connects buyers with sellers, allows you to buy and sell bitcoin with fiat currency and other cryptocurrencies. Some exchanges also offer leveraged bitcoin products, which are more suited to experienced traders.
Investors and traders can use bitcoin exchanges, which work like traditional stock exchanges, to put in orders to buy or sell bitcoin. The exchange controls the wallets of customers and performs cryptocurrency transactions on their behalf.
A market order directs the exchange to buy or sell bitcoin immediately at the best available price for the trader. A limit order directs the exchange to buy or sell at a certain price. When a trader inputs an order, it gives the exchange permission to use their funds to buy or sell at the limit price they specify.
All the orders submitted by traders are collected together by an exchange in an order book. The order book is composed of asks and bids, which represent orders to buy and sell respectively. Orders remain in the order book until another trader matches the price, at which point the order will be fulfilled and the trade completed.
Different Types of Bitcoin Exchanges
There are different types of bitcoin exchanges:
- Fiat-to-cryptocurrency exchanges (where you can trade fiat currency for bitcoin/altcoins and vice versa),
- Crypto-to-crypto exchanges (where you can trade between bitcoin and altcoins), and
- Cryptocurrency derivatives platforms (where you can trade cryptocurrencies on leverage).
Exchanges vary in the deposit methods they support, with most taking deposits in the form of bank wires or cryptocurrency, but can also include credit/debit card, money orders, gift cards and more. Deposits requires the user to pay a transaction fee for a cryptocurrency transfer or a fee for a bank wire or fiat deposit.
Once you have funds on the exchange, fees will be charged for any trades you make (which usually depends on the size of your order and cumulative volume with the exchange over a certain time period). Exchanges vary in the fees they charge for deposits, trading, and withdrawals.
Profits from trading should not be left on exchanges for long periods of time and they can be withdrawn to a wallet you control for a small fee. A bitcoin exchange is not the same as a bitcoin wallet. Once you have deposited your bitcoin (or altcoins) into your exchange account, you no longer control the private keys.
Security measures vary across exchanges, so be sure to do some research before sending money to an exchange.