Understanding The Process of Bitcoin Exchange
Do you know how Bitcoin exchanges work?
If you are a beginner who wants to know about Bitcoin, then you are on the right page. Before you start trading, you have to know some of the basics first, and that includes the process of every bitcoin exchange. By knowing the process of Bitcoin exchanges, it will give you an upper hand in dealing with your crypto investment. So how does it work? Read everything below.
Sometimes people wonder how crypto exchanges works.When you buy Bitcoins from an exchange using a bank transfer or credit card, where are the Bitcoins you’re buying sourced from?Is it that you have to buy Bitcoins from an individual who’s actively selling their Bitcoins. Do they just buy a massive amount of coins all at once and slowly sell them off?
Nope I don’t think so. Below are how exchanges works:
Exchanging is done by placing “buy” or “sell” orders, which the exchange system software then matches with each other.(using Bitcoin for example)
“Buy” orders (or “bids”) are offers to buy bitcoins in exchange for another currency at a maximum price-per-bitcoin which is set by the offerer. “Sell” orders (or “asks”) are offers to sell bitcoins at a minimum price-per-bitcoin.
If the bid price of a buy order is higher than the ask price of a sell order, an exchange can be performed and either the bid order, the sell order or both can be removed from the “order book”. Thus, at any given time, there is a price above which there are no more buy orders and a slightly higher price below which there are no more sell orders.
Communication with the Bitcoin currency exchanges is commonly done using a standard web browser, over a secure SSL connection.
An exchange is where buyers and sellers conduct their business. A seller of BTC deposits BTC with the exchange’s address. He can then use his positive BTC balance in the exchange to sell his BTC for Dollars (or other coins). Similarly, a buyer of BTC deposits USD with the exchange and then uses the balance to buy BTC from sellers.
Real exchanges, like MtGox or Bitstamp, are really just a medium between traders. People can set limit orders to buy / sell bitcoins for a certain price. The exchange will match buyers and sellers when conditions of both the buyer and the seller are met.
There are two types of orders: limit orders and market orders. Limit orders allow a trader to buy bitcoins at a price lower than the current price or sell bitcoins higher than the current price. However, these orders will only be executed once another user accepts them. Market orders will just find the best matching limit order.
Let’s say the last trading price is 100 EUR/BTC.
Two people want to sell bitcoins but not for 100 EUR. One sets a limit order for 105 and the other for 110.
So the best price to buy bitcoins for is then 105.
When a person places a buying market order, it will look for the best price and it will buy from the one trader for 105 EUR.
If the buyer wants to buy more than just one bitcoin, he will continually take the lowest price available. Doing this, the “price” of bitcoin will increase as the lower-price sell orders are no longer available.