At first, buying or selling bitcoin online appear a daunting task. But it's not. Often, it's just like using PayPal or any other online payment system. Skip over to a bitcoin exchange and have a merry time lining your pockets with your currency of choice.
Warning: Trusting your money to an exchange can be dangerous. Imprudent exchanges have lost customer bitcoins in the past. Be careful. Proceed only if you understand that this can occur.
Using a Bitcoin Exchange
Exchanges connect bitcoin buyers to sellers, offering an easy way for users to buy or sell bitcoin without meeting with another person that wants to trade the exact amount of bitcoin. The definition of an exchange is a little murky. For example, with some services, buying and selling bitcoins is the sole goal. Other services are integrated platforms, paired with bitcoin wallets and other features that the users can use. For the purposes of this guide, exchanges are defined as any service that allows buying and selling bitcoin on its payment service, whether its the only service it provides or not.
Before going further, you need to set up a wallet, so you have some place to put your bitcoins.
Navigating online exchanges is usually pretty easy. For most exchanges, you will need to hook up with a bank account, which can take a couple days (Coinbase offers instant verification if you login with your bank username). Generally, the sites, like Bitstamp shown below, will display “buy” or “sell” links. Type in the amount of bitcoins you want to buy or sell. Click a button that indicates willingness to complete the transaction. Then you're good to go.
The drawback of these virtual exchanges is that depositing and withdrawing bitcoins in fiat (USD, Euro, or similar) is a slow process. Usually it takes 2-5 days before you receive any withdrawal back on your bank account, same when you send funds to deposit on a Bitcoin exchange. Trading them in-person is instant (check out LocalBitcoins.com). But the convenience of buying and selling online without the hassle of setting up a meeting with another person is one reason online exchanges like Bitstamp and Coinbase are so popular.
Exchanges generally charge a trading fee under 1%.
Know Your Customer laws and Other Bitcoin Regulations
Bitcoin exchanges must conform to state regulations. In order to comply with these regulations, customers are prompted to verify their identity in order to participate. Regulations vary between country, but exchanges generally must abide by Know Your Customer (KYC) and Anti-Money Laundering (AML) laws.
Because of this, exchanges often don't provide as much privacy or anonymity as many Bitcoin enthusiasts like.
The Present State of Bitcoin Exchanges
Bitcoin exchanges aren't exactly short in supply. More are always popping up to enter the fray or improve on different aspects of the exchange status quo. Established quality exchanges that have built up trust are smaller in number.
Described within are a few long-established, trusted places to buy and sell bitcoins in USD. Coinbase, Bitstamp, and BTC-e, have established themselves as the dominant exchanges. Coinbase is probably the most trusted, while BTC-e is more mysterious. The owners have yet to reveal their identities, no one is sure where it is located, and the website features scrolls of Cyrillic text. A more comprehensive list of exchanges can be found here.
Exchanges in non-U.S. countries are also numerous. But the availability of exchanges depends on the country and desired currency. Most exchanges don't support more than a couple currencies. Again, take a look at this list for a comprehensive view – it shows what currencies each exchange supports.
Both China and Russia have taken a harsh stance against the currency in the past. With uncertain regulations, it is a little trickier to gauge whether or not it is a safe idea to use companies based in regions that are less friendly to bitcoin.
Mt. Gox, the once-dominant bitcoin exchange, floundered and drowned earlier in 2014. After an alleged hacking, the former-king exchange lost many bitcoins. This is one reason some people may prefer to buy and sell Bitcoin in-person and use over-the-counter exchanges like LocalBitcoins.
That said, post-Mt. Gox many exchanges have made an extra effort to offer transparency and prove security of bitcoin. Third-party audits have been in vogue. Bitcoin exchanges are now expected to provide more evidence that they're taking careful care of the bitcoin their customers are trusting to them.
Exchanges like Kraken and Bitfinex quickly passed proof-of-solvency test post-Gox, which is a demonstration that the exchanges hold all the funds they claim to have. Bitstamp passed a test conducted by core Bitcoin developer Mike Hearn.
It's a first step. In a sense, the exchanges are regulating themselves to gain the trust of customers. But these don't amount to a comprehensive financial audit, which should take weeks.
Future Bitcoin Exchanges and “Payment Platforms” to Look for
Circle recently sprang up nailed to a mission to bring bitcoin to the masses. It aims to provide an easy-to-use product that isn't plagued by volatility, offers insurance, and is free to use. Pitched as a pseudo-bank for Bitcoin, it allows people to store and exchange bitcoin. It is currently invitation-only but will expand its audience.
BitReserve, creation of founder of CNET Halsey Minor, has another goal in mind: To stomp out Bitcoin volatility. That's a tall order. Currently, it's in beta. But once it opens up, it will allow conversion to and from five currencies – U.S. dollars, euros, pounds, yen and yuan.
Also worth mentioning is a meager – but compelling – trend towards decentralized exchanges. Coinffeine aims to develop a peer-to-peer platforming exchange, requiring little to no trust in a centralized exchange. This tool would also give customers a lot more control over their bitcoin—although it can be riskier in other ways. User-friendly? For better or worse, at least developers want to make it an option for consumers.
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Trading bitcoin in person is another option. LocalBitcoin is a dominant player in this area. There are pros and cons to using each method of bitcoin trade. Stay updated on the latest Bitcoin exchange news here.
Images from Shutterstock and Bitstamp.