Selecting the right cryptocurrency exchange
The way Bitcoin behaves as an asset is surely every trader’s dream as it poses a lot of opportunities for significant profits. Bitcoin is still relatively green and the market is easily comparable to the early days of Forex. Huge volatility, very fast-paced, ongoing 24/7, and outlining a perfect condition for new bitcoin exchanges to try and capture a market share. This, however, comes at a huge cost as it provides an arch of weak points never seen before, exposing newbies or even experienced traders to a lot of crafty scammers in the industry.
In the field of cryptocurrency trading, there are new exchanges and trading platforms popping up almost every day. It’s crucial to distinguish which are trustworthy and which ones will run away with your money after a set period of time. Selecting the right exchange that will fulfill a certain set of requirements is of crucial importance.
Buying and selling Bitcoin and altcoins directly is done on Spot exchanges where the underlying asset is traded with an active order book. Therefore on spot exchanges for every buyer, there is a seller and vice versa. Usually, most of the spot exchanges have the option to purchase bitcoin or altcoins with currencies such as USD, EUR, GBP, therefore, giving the option to deposit through debit, credit cards, PayPal, or Bank Transfers.
Brokers work in almost the same way as trading platforms, with one main difference – the broker itself is both the buyer and the seller. The buy and sell orders are filled on the pretext of a predetermined price provided by the broker. These types of platforms usually boost a much more user-friendly environment making the buying and selling a smoother and simpler experience, however, they might charge a slight premium when providing the service.
Margin Trading Exchanges
Margin trading platforms is where you go to trade, long or short various assets with leverage. Those platforms are not recommended for people who have little to no experience in trading.
Platforms that offer CFDs (Contract for Difference) are the most lucrative type of exchanges as they offer leverage where you don’t directly trade an asset. You buy into a contract of difference which may have scalable leverage of up to 100x or even more in some cases. You bet (short or long) on where the price will go in the near future. The CFDs borrow you money when you open a position. When going to a margin trading platform keep in mind that they are created for experienced traders where they get a full set of advanced trading instruments and order types.
There are exchanges that aim to offer as many trading instruments as possible in a single product offering ranging from Spot, Margin to Options trading. Some of the exchanges offer Spot and Margin trading on one platform, combining the best of both worlds.
One of the oldest ways to buy Bitcoin and other cryptocurrency is peer to peer, where there is no middle man involved in the transaction. P2P platforms only connect the two parties and providе the needed security when a trade is executed. This type of buying and selling holds a higher risk, especially if a user chooses to buy or sell directly in-person with another user. This method is highly used in problematic countries where people have limitations due to sanctions or imposed limits from internal or external entities.
Choose the Location and the Payment options
Most of the exchanges accept users from all over the world with exceptions for nations that are under international sanctions. For buying Bitcoin or altcoins with fiat currencies it is recommended to choose an exchange that can legally operate in your jurisdiction. Different exchanges offer different fiat currencies for deposits depending on where they are allowed to operate in and if they have the appropriate license for being money transmitters. Some of the brokers only allow deposits for fiat currencies with withdrawals available only for the purchased cryptocurrencies. The exchanges that have obtained the necessary licenses to operate with currencies like the USD or the EUR usually have several methods for deposits and withdrawals like:
- Credit Card
- Debit Card
- Bank Transfer
- And more…
Check the reputation of the exchange
When in doubt while selecting from a few potential exchanges ask yourself those questions:
- Has the exchange lost user funds?
- Does the exchange have good performance and stability?
- Does the exchange apply high-security practices?
The reputation of exchanges is one of the most important factors that need to be taken into account. As there are many exchanges that present themselves as a very safe and secure place to trade and exchange Bitcoin and altcoins, but the truth is that some may have poor support, bad history, users losing funds due to hacks, etc…
If you are into day trading, stability and good performance become even more important. Researching and even testing the exchange or the trading platform with a small amount of funds, can be in your favor. As in this way, you will know from experience if the platform is up to par with your requirements. On some exchanges, there are cases when the whole trading platform freezes during high volatility events thus leading to undesired position liquidation if the used leverage was high.
Selecting an exchange with low fees can save you a lot in the long term. Fees build up over time and can lead to a significant impact on your overall performance.
Depending on the type of platform, there are different fee structures. Usually, the service providers have a standard that they stick to, but in some cases, you may pay fees much higher than normal. Some exchanges have a bad reputation because of hidden fees which make their platforms not-suitable for day traders and people who often exchange Bitcoin and cryptocurrencies.
In the financial sectors, AML (anti-money laundering) laws apply to a high degree, especially when an exchange is allowing the buying and the selling of digital assets for currencies like the USD, EUR or GBP. Usually, an exchange needs to cover requirements in order to receive a license to allow it to operate in various jurisdictions and with various assets. Therefore, this means that a regulated exchange is potentially supposed to have a better internal security framework.
Every country has a different regulatory body that is responsible for the rules and permissions that are granted to financial companies etc… In most cases if an exchange receives a license from a high profile regulatory body like the SEC in the United States, the license is valid and accepted in most of the countries in the world, of course, there are exceptions.
Here are some high profile regulatory bodies:
- SEC – U.S. Securities and Exchange Commission in the USA
- CySEC – Cyprus Securities and Exchange Commission
- FSA – Financial Services Authority of the UK
- GFSC – Gibraltar Financial Services Commission
- CSRC – China Securities Regulatory Commission
All of the regulated exchanges have a KYC procedure which on most of them is mandatory by default. It is one of the requirements of AML5 that must be fulfilled in order to receive a license. Due to regulatory pressure and potential risk KYC is available although not mandatory on some unregulated exchanges.
As stated above, some of the regulatory bodies of big nations have a heavier impact around the world compared to those of smaller nations.
Questions of interest to new retail investors in Bitcoin
Which bitcoin exchange is the best?
There is no definite answer to which exchange is the best as each and every legitimate one excels in a different category. Some provide an excellent set of features with high-security practices, while others exceed in fast order execution and lower fees.
Every user should do their own research based on his needs and what type of trading he’s interested in.
Who can buy/invest in Bitcoin?
Theoretically, anyone can buy and sell Bitcoin anywhere in the world if they have a device on which they can install a bitcoin wallet. Individuals residing in sanctioned nations can find it more difficult to buy Bitcoin through the big fiat gateways. This is why usually people from those countries resort to OTC trading and local fiat to crypto exchanges. If a country deems buying and selling Bitcoin illegal, people will find it much more difficult to get a hold of some BTC. Usually, such bans don’t work at all because of the decentralized nature of Bitcoin.
Can I buy less than 1 full Bitcoin?
One Bitcoin consists of 100,000,000 units, called a satoshi. Bitcoin is divisible to the 8th decimal, meaning that you can own fractions of it. A simple example would be:
0.00000001 BTC = 1 Satoshi
0.00000010 BTC = 10 Satoshi
0.00000100 BTC = 100 Satoshi
0.00001000 BTC = 1 000 Satoshi
0.00010000 BTC = 10 000 Satoshi
0.00100000 BTC = 100 000 Satoshi
0.01000000 BTC = 1 000 000 Satoshi
0.10000000 BTC = 10 000 000 Satoshi
1.00000000 BTC = 100 000 000 Satoshi
Whenever sending out bitcoin, it is advisable to double or even triple check the quantity sent. It is easy to get confused when dealing with fractions of bitcoin due to the many zeroes involved after the decimal. Fortunately, nowadays, most exchanges and wallets display currency equivalents on the sending page, making the transfers easier.
How to sell Bitcoins?
Selling Bitcoins usually is done through fiat gateways where you can legally sell for USD, EUR, or any other fiat currency. Some of the exchanges that offer a secure platform for such activities are also regulated and adhere to high-security practices. There is also the option to sell Bitcoin over the counter taking cash or through bank transfer directly from another person.
Is it better to mine or buy cryptocurrencies?
It depends. Usually, early birds to mining have the clear advantage of amassing a lot of coins before anyone else takes notice of that particular coin. In order to do so, however, you would need the necessary equipment. Be it ASICs or GPUs, it isn’t cheap to set up a reasonably good farm. It comes with a lot of risks as most new coins rarely reach ROI to be worth your time.
Factors to consider are:
- The cost of electricity per kW/h
- Hardware cost
- Competence when it comes to setting up and managing the machines (overclocking, undervolting for GPUs)
If all of the above is clear to you, then mining might be an interesting hobby for you, plus you will be supporting decentralization by providing your computer power.
For early ETH, GPU miners, it would’ve been the same to just buy the coins rather than spend hundreds of hours managing heat, crashes, pool downtimes, and so on. With time, more and more mining rigs are made, the competition to discover a block becomes exponentially higher and your participation in a pool is dropping, you would need to keep on expanding your mining rigs, which is usually done by compounding using your mining profits.
Nonetheless, whenever there’s no more profit in mining a certain coin, you can just swap with another one using the same or similar algorithm and it is indeed really cool to just open up the app on your phone and see how your machines are performing in the background and earning you some coins here and there.
Do I need to prepare a Bitcoin wallet before buying?
It is recommended that you get a bitcoin wallet prepared before you buy Bitcoin so you can transfer it out of the exchange right after you buy it. Install a wallet on a secure device, back it up, set up a strong access password and you are good to go. On our bitcoin wallets page, we have tested and reviewed dozens of Bitcoin wallets which will help you to select the right wallet according to your preferences.
When is the best time to buy Bitcoin?
Bitcoin is still in its infancy days and its market cap is very tiny, compared to other assets and other currencies. When you should buy is up to you to decide after you do some research. Aiming to buy bitcoin at the very bottom is extremely hard, therefore, the most effective way to buy Bitcoin is to dollar cost average on a set timeframe. Dollar-cost averaging on a set time-frame will mitigate risk and give the opportunity to buy any potential dips in the near future and by risking less of your funds.
Why do people buy Bitcoin?
There are different reasons for people to invest in Bitcoin. Some are speculating that it will go much higher in value, while others invest in it because they believe in its fundamentals.
People investing in bitcoin, usually do it as a means of diversification to their portfolio of investments. Blockchain altogether is quite an interesting concept that proves itself as a needed invention when it comes to scaling transaction speeds, costs all the way to logistics and immovability in real-life applications.
Bitcoin is also considered to be a hedge against the current economic outlook and especially a hedge against bad monetary policies. Learning about the fundamentals will help you understand why it is so valuable (theoretically).
Here are some of the unique Bitcoin characteristics:
- Free of government and central bank control
- Highly limited
On the other side, there are the fiat currencies on which our whole economy is relying to exchange value. The currencies that are used today all over the world are inflationary by design, which means that they are designed to lose value over time. Those currencies are under the control of central banks which are responsible for the monetary policies. Bitcoin is a hedge against the central banks which have done quite the damage to our savings, especially in the last two decades.
Take for example what happened in Venezuela, the national currency is literary in a death spiral thanks to hyperinflation. People lost their savings, the currency is almost unusable because you need a whole bag full of it to buy goods. In that country bitcoin and other cryptocurrencies provided an exit, a solution, and thanks to that those who acted on time saved their savings and most likely even made a profit in the process.
Bitcoin is a revolutionary invention that has the potential to change a lot in the financial spectrum and how we handle money. Of course, there are a lot of risks and unknowns involved here, but considering how high the potential is, taking the risk is most likely worth it. Never invest more than what you can afford to lose!
Are Bitcoin transactions anonymous?
Your identity as a user when making bitcoin transactions is anonymous because of your wallet address. It is a randomly generated string of characters that you can opt-in for changing every single time after using it. This makes it impossible to tie an identity with the corresponding wallet addresses unless a third party decides to reveal an identity connected to that specific address.
The transaction itself is NOT anonymous as all of the data including value, timestamp, origin are public and permanently stored on the blockchain. All transactions can be viewed by anyone on the network by simply using a block explorer.
Is the Bitcoin price volatile, can it crash?
Bitcoin and the crypto market in general is considered to be one of the most volatile at the moment. Due to the unique nature of Bitcoin, being highly limited and still, in its early days, the price fluctuations can be enormous at times. Looking back at its price-performance history we can clearly see how volatile the price of a deflationary asset can be. In 2017 the price of bitcoin at the beginning of the year was around 1000$ and in the span of one year it has gone up to 20 000$, but what happened after that is what may scare a lot of people. The price crashed over 80% in 2018, eating a big chunk of the money invested in late 2017. Most likely Bitcoin will continue to be highly volatile and experience big price fluctuations for the foreseeable future.
Are crypto exchanges anonymous?
There are exchanges that are anonymous which for the most part offer trading instruments, deposits, and withdrawals only on cryptocurrencies as they don’t have the necessary licenses to operate with fiat currencies like the USD. Most of the fiat gateways or exchanges that allow you to buy Bitcoin with USD or EUR etc… are not anonymous as they have a mandatory KYC procedure. The good news about people searching for an exchange for trading that does not require KYC is that there is plenty to choose from. Here on bitcoinbuyersguide you can find our list for the best anonymous bitcoin exchanges in 2020.
Why do some exchanges require ID verification?
Exchanges require ID verification because of mandatory KYC procedures from regulators and AML5 in some regions. This is in order to fight money laundering which is to block individuals who obtained their funds through illicit means (stolen funds, scams, or money made by selling drugs etc…). Those exchanges are considered one of the most secure in the crypto industry. On top of all of the security layers, the KYC procedure adds one more level as in case something happens to your account and you lose access to it, you can use your identity to recover access to the corresponding account.
Where can I check Bitcoin and Ethereum transactions?
There are multiple blockchain explorers available on the web which are user friendly providing an easy way to check transactions or a specific address. At some point you will definitely need to check the status of a specific transaction, this is inevitable due to the sole nature of Bitcoin and other cryptocurrencies. Keep in mind that there are specific blockchain explorers different for each altcoin on the market. Therefore if you want to check a transaction that is on ETH you need to go to Ethereum blockchain explorer. One of the most used Ethereum blockchain explorers is etherscan.io which is a whole service provider on its own by offering multiple data instruments and much more. One of the most used Bitcoin blockchain explorers out there is the blockchain.com explorer on which you can also explore Ethereum and Bitcoin Cash transactions alongside Bitcoin transactions. Another prominent Bitcoin explorer is the one of blockstream.info. Here is a wiki page that contains a list of Bitcoin blockchain explorers.
Should I use more than one exchange?
If you want to do more besides only buying Bitcoin, you will end up using more than one exchange. The more you get involved and stick to this industry it is more likely to use multiple exchanges. Also, it is recommended to use more than one exchange always for security reasons. Using multiple reputable exchanges to buy, sell, and trade Bitcoin will mitigate a lot of risks as there is always the possibility for the exchange to be hacked or like in rare cases the exchange itself to lose access to the private keys of their Cold wallets like in the case of QuadrigaCX. There is one rule in the Bitcoin space – not your keys, not your Bitcoins.
Also, there are different types of exchanges that offer completely different trading instruments and trading pairs. There are dedicated exchanges only for trading, there are spot exchanges and there are non-custodial fiat gateways.
Buying Bitcoin or altcoins?
Bitcoin is the biggest and most well-known cryptocurrency which is also theoretically the most secure. Most likely we are going to see Bitcoin going to new highs and making incredible gains but some of the altcoins are very strong projects with fundamentals that cannot be ignored. On top of that due to the lower market cap of the altcoins, the successful ones will outperform BTC in overall gains. Investing in altcoins, especially small-cap ones comes with significant risk, and investors seeking a more lucrative investment than bitcoin in the crypto space should not invest more than they can afford to lose.
Where can I use my Bitcoins?
There are multiple stores and places around the world that started accepting bitcoin in recent years. Some of the most prominent companies that accept bitcoin in 2020 are Wikipedia, Microsoft, Expedia, AT&T.
On top of that, you can find retail stores around major cities in almost every country that accepts bitcoin. In some countries that experienced hyperinflation like in Venezuela, even Burger King accepts multiple cryptocurrencies like Bitcoin, Dash, Litecoin, Ethereum, and even Tether. Even KFC Canada accepted Bitcoin for a limited time, they sold the “Bitcoin Bucket” which could be ordered online with the payment being processed by Bitpay. You can buy games on sites like G2A with Bitcoin again processed by Bitpay. Even Playboy launched a payment option for cryptocurrencies. Most notably, a platform from the gaming world that accepts Bitcoin and other cryptocurrencies through Bitpay is Twitch – the biggest gaming streaming platform. If you are a billionaire and want to spend your fortune on more exotic services you can go to Virgin Galactic to pay with Bitcoin for space travel.
List of some companies accepting Bitcoin in 2020:
- Miami Dolphins
- Virgin Galactic
- Norwegian Air
- Some branches of Subway
- The Internet Archive
- Skapto Burger
Bitcoin adoption and acceptance is gradually growing with the exceptions of countries like Venezuela where people and businesses are forced to accept everything buy their own national currency thanks to bad monetary policies that led to hyperinflation and making the currency unusable. Keep in mind that this industry is still in its very early days and acceptance all over the world will not happen overnight, it will happen most likely gradually throughout the years.
How is Bitcoin Taxed?
In general, Bitcoin is classified as an asset and is not considered to be a currency issued by a central bank. Depending on the user’s country of origin, different laws and regulations apply as Tax authorities in different countries classify Bitcoin differently.
In countries like the US, for example, the IRS requires that every cryptocurrency transaction be reported, regardless of its size, so every US taxpayer must keep a record of all cryptocurrency transactions, whether they are with Bitcoin or other cryptocurrencies. Because Bitcoin is considered as an asset, every sale, purchase, or trade is considered a barter. This allows Bitcoin (and other altcoins) to fall within the capital gains tax report, which is dynamic and depends on how long the bitcoins have been held.
The following activities fall under taxations:
Selling Bitcoins (or other altcoins), mined personally by you, to a third party provider (such as an exchange, person, etc.) or using them as exchange collateral to buy (barter) goods and services.
Selling or exchanging Bitcoin for goods and services to a third party, which are originally obtained through a purchase from someone (broker, exchange, etc.) and not personally mined by you.
In the first scenario, if you’ve mined said cryptocurrency by yourself and it’s sold or exchanged for money, goods, or services, you’re looking at a personal or business income taxes and the second scenario is regarded as capital gains (or losses).
Luckily, most bitcoin and cryptocurrency exchanges have built-in tax reporting tools (or at least keep full logs) containing all of your activities in an easily exportable PDF file.
The following tools are decent and will serve you extremely well when it comes to tax reporting:
Bitcoins and Taxes – Investopedia