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Bitcoin

How Do Bitcoin Exchanges Work?

As Bitcoin hits all-time highs, interest in cryptocurrencies is increasing. Major corporations are getting behind Bitcoin as a currency now, and individuals are now considering buying their own Bitcoin.

Digital Wallet

Before anyone can buy Bitcoin, they will need a place to store it. Bitcoin isn’t a tangible coin, it’s a digital currency. It resides in special databases called a blockchain. Before someone buys Bitcoin or any cryptocurrency, they need a digital wallet to store it in. There are three types of digital wallets:

  • Mobile wallets are convenient and portable. But if you lose the device without a backup, you can lose your Bitcoins.
  • Desktop wallets give users more control over their funds. They are susceptible to viruses and hackers like anything else that is stored on a desktop.
  • Hardware wallets are the most secure, but be sure to make backups.

What is a Bitcoin Exchange

A Bitcoin exchange is a place to buy or sell Bitcoin and other cryptocurrencies. Bitcoin can be bought or sold with other forms of currencies, like dollars or other cryptocurrencies. There are two types of Bitcoin exchanges.

Centralized Cryptocurrency Exchanges

These types of exchanges are comparable to a bank or stock exchanged. These types of exchanges use a third party to conduct the transactions. This ensures that the transactions go smoothly.

Buying and selling Bitcoin on a centralized exchange gives a better sense of security, knowing that the transactions will go as planned. Centralized exchanges also make it easier to link a bank account when buying cryptocurrencies.

Decentralized Cryptocurrency Exchanges

A decentralized cryptocurrency exchange, also known as DEX, does not use a third party. The idea is that they are more secure because there is no central exchange server that can be hacked. Another positive for the decentralized exchange is they can have lower fees and faster transactions.

A drawback with a decentralized exchange is you need a little more knowledge or skill with technological issues, because these exchanges do not offer simple transactions from bank accounts. Some cryptocurrency exchanges include:

  • Coinbase is the best
  • Cash App is good for beginners
  • Bisq is the best decentralized exchange
  • Binance is best for alt coins

On platforms like tastytrade, you can trade cryptocurrencies along with options, stocks, and futures.

How Do Bitcoin Exchanges Work

For anyone new to cryptocurrencies, their first question is most likely, how do Bitcoin exchanges work. A typical transaction will be as follows:

  • Find a digital wallet and set it up
  • Find a centralized Bitcoin exchange, which is easier to use than a decentralized exchange
  • Create an account and add some money from your checking account or debit card
  • Buy a Bitcoin or any other cryptocurrency

You do have the choice of keeping your Bitcoin at the exchange you bought it from. But it is suggested that it is moved to a personal wallet.

According to SoFi, “That’s because the exchange could get hacked and you could lose your shiny new Bitcoin. Or the exchange might suddenly close up shop and your Bitcoin might go right along with it.”

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