An introduction to Bitcoin Exchanges

An introduction to Bitcoin Exchanges

Regular visitors to the Coinbet.com website are familiar with the fact that it is possible to play with bitcoins or another cryptocurrencies at an online casino. Of course, that casino has to accept crypto as a deposit method. One of the things we have not yet discussed in detail is where that cryptocurrency actually comes from.

You may be fully aware that Bitcoin gambling exists. But do you know where bitcoins from? Do you know how to procure bitcoins of your own? That is what we will explain in this post, and it all begins with what is known as the cryptocurrency exchange.

We will focus mainly on bitcoins to keep things simple. With that said, you could do an online search for Bitcoin exchanges and find dozens of them. Bitcoin exchanges exist all over the world, bringing together buyers and sellers with a common passion for cryptocurrency.

Cryptocurrency exchange basics

As unique and distinct as bitcoin is from fiat currency, there is no way to completely separate it from well-known currencies like the U.S. dollar and British sterling. In order to buy bitcoin initially, you have to have some sort of fiat currency to facilitate the transaction. There is only one other way to obtain bitcoin: by mining it.

The easiest way to understand this first point is to think of the cryptocurrency exchange as being no different than a fiat currency exchange at the airport. If you were departing France on your way to a holiday in Japan, you might exchange some of your euros for Japanese yen.

Now, you know the airport exchange is not going to give you yen for nothing. You have to buy with euros. Not only that, the exchange rate will not be one-to-one. One currency or the other will be worth more, facilitating a less-than-even transaction. The exchange itself will add a fee in order to make a profit.

Buying your first round of bitcoins works in much the same way. You use fiat currency to purchase bitcoins at a given rate of exchange with fees added by both sellers and the exchanges they post on. This leads to the next point: the fundamental difference between crypto and fiat exchanges.

How the exchanges differ

You plan to do a little casino gambling during your hypothetical holiday to Japan. That is one of the reasons you want to carry some native currency with you. When you make the exchange at the airport, you are dealing only with the exchange itself. That exchange owns all the currency it trades. This is not so with a cryptocurrency exchange.

Just like bitcoin is computer code rather than tangible money, a Bitcoin exchange is a computer-based platform rather than a physical entity. The exchange itself does not own any currency outright, nor does it actually buy and sell. It acts only as a facilitator between individual buyers and sellers.

In this regard, cryptocurrency exchanges are a lot like brokerages that deal in securities. Sellers looking to dump bitcoin post a sell order on the exchange complete with an 'ask' price. Those who want to buy browse the sell orders until they find one they like. Then they post a buy offer complete with the 'bid' price. If the buyer's bid price is higher than the sellers ask price, the transaction goes through.

The ask price/bid price model is exactly how you buy stocks on a stock exchange or fiat currencies on a FOREX exchange. Though the model may be complicated to beginners, it serves a valuable purpose: the difference in the two prices creates an automatic barrier at which no more sell orders can take place. This protects both buyers and sellers.

As we move into the next section of this post, the most important take-away here is that buyers and sellers use exchanges as a means of connecting. Exchanges charge fees to cover their own costs and make a profit, but they are not the ones actually buying and selling. A Bitcoin exchange is merely the cryptocurrency equivalent of an electronic brokerage.

Sellers are like brokers

If a cryptocurrency exchange is electronic brokerage, sellers are the cryptocurrency equivalent of brokers. At least that is the case most of the time. It is rare for the majority of an exchange's sell orders to come from single, individual owners just looking to dump their bitcoins and get out. Most of the sellers are brokers who actually make a living on the exchanges.

Theintercept.com published an excellent article in late November 2018 profiling one U.S. broker who makes his living buying and selling crypto all over the world. We can use his story to explain the basics of how this works. We will use the same alias The Intercept used to protect this man's identity: Eric.

Buying and selling with gift cards

Eric has been trading bitcoins for quite a few years now. When he first started, he could apply a 100% markup to all his sales. If he bought $100 worth of bitcoin, he could sell it on an exchange at $200. These days, his markup is closer to 30%. Bitcoin is so easy to get now that higher markups are no longer possible.

To get things going, Eric will buy a certain amount of bitcoins at the lowest price he can find. He will then turn around and create a sell offer with a higher price, knowing that there are buyers more than willing to pay the higher price due to their belief that bitcoin's rising value will make them money in the long run.

The interesting thing is that Eric requires payment be made in the form of a gift card. Why does he do this? To prevent getting ripped off. Eric knows that gift cards are bought and paid for before they are issued. He knows that when an electronic gift card comes in, there is cash value behind it. He doesn't have to worry about credit card charge-backs or wire transfers to turn out to be fraudulent.

Eric will use the gift cards he receives to make personal purchases. He will also use them to buy more bitcoins. Sometimes he even sells the gift cards on the open market in exchange for cash. At any rate, the gift card is his medium for making transactions without having to worry about bank issues.

Note that there are other ways to buy and sell as a broker. There are some who are more than happy to conduct business with more traditional payment methods like credit cards and electronic payment systems. Eric just chooses to use gift cards to keep banks out of the equation.

A turnkey, low overhead business

The beauty of what Eric does lies in the fact that his business is a turnkey, low overhead business. He conducts all his business with a smartphone and a couple of apps. That's it. He doesn't maintain an expensive office in the middle of a metropolitan area. He doesn't have a staff. It's just Eric and his smartphone.

Likewise, exchanges are minimalist by design. Theoretically, you could start your own exchange by setting up a platform buyers and sellers could access through their web browsers. It doesn't take much in terms of time or financial investment. You could run the entire exchange business from a laptop computer and nothing more.

The lack of overhead and relatively small initial investment combine to make it very easy for exchanges and brokers to make money dealing in cryptocurrencies. This is perceived as yet another benefit of the crypto model. Business owners do not have to be a powerful high street banks in order to get in on the game. Virtually anyone can start buying and selling cryptocurrency.

What it means to you

By now you might be wondering what any of this has to do with you. After all, you just want to find a Bitcoin casino and play a little MegaMoolah.com or some other jackpot game. Fair enough. Let's talk about how your desire to gamble online relates to what Eric and cryptocurrency exchanges do.

You are a smart person. You do not want to pay any more than you have to just to buy some bitcoins. The first thing to understand is that exchanges are not all the same. It pays to do a couple of hours of research to figure out which exchanges are the most reputable and offer the best deals. Don't just start buying in the first exchange you come across.

Next, understand that sellers don't do what they do out of the kindness of their hearts. They are in this to make money too. Your goal is to dig around and look through as many sell orders as you can in order to get the best deal. No matter how you slice it though, you are not going to get a one-for-one deal. You are going to pay for the cost of the bitcoins, plus the seller's markup and any fees assessed by the exchange.

Once you have your bitcoins in hand, so to speak, you can then go deposit at your favorite casino and start playing. You might win a jackpot and never have to deal with Bitcoin exchanges again. But then, you might not. You might find yourself back at the exchange buying more bitcoins later. That's the way it goes.

Byline: This article was published by Henry.
About: I'm a bitcoin advocate and admin of Coinbet.com.