Before starting today with Working of Bitcoin Exchange, with respect to deposits and trade transactions, the last session was dedicated to a detailed overview of Bitcoin transactions. Today, under the Working of Bitcoin Exchange, we take a look at deposits and trades using Bitcoin.
Working of Bitcoin Exchange - Deposit
Before you can attempt to buy or sell anything on an exchange, you need to fund your account. This is like funding an account with a traditional broker before being allowed to buy traditional financial assets. Exchanges have bank accounts and cryptocurrency wallets. In order to fund your account you click on ‘Deposit,’ then follow the instructions.
In Working of Bitcoin Exchange, if you are funding your account with fiat currency (presumably in order to buy cryptocurrency), then the exchange will display a bank account for you to make a fiat currency transfer to. If you are funding your account with cryptocurrency, (presumably to sell for fiat currency or trade for a different cryptocurrency) then the exchange will display a cryptocurrency address for you to make a cryptocurrency transfer. Once an exchange has detected the transfer to their bank account or cryptocurrency address, the balance will be reflected in your ‘account balance’ on the exchange’s website, and you are ready to trade.
Working of Bitcoin Exchange - Trade
You can now trade up to the amounts you have deposited. For example, if you have deposited USD 10,000, then you can buy up to $10,000 worth of cryptocurrency. If you have deposited 3 BTC then you can sell up to 3 BTC for fiat or other cryptocurrencies that is available at that exchange. Prices are expressed in pairs that look something like this: BTC/USD or BTCUSD with a number such as 8,000.
The way to read this is, ‘One unit of BTC costs 8,000 USD’. Not all currencies can be traded for each other—it is really up to the exchange as to which pairs they enable. For example, you may see BTCUSD and BTCEUR as trading pairs, meaning that you can trade BTC with USD and trade BTC with EUR, but you may not trade USD with EUR directly if you don’t see EURUSD. In that case, to convert USD into EUR, you’d need to sell USD for BTC and then use the BTC to buy EUR.
You will see a screen of other people’s bids and offers. These are the prices at which they are willing to trade, and how much they are willing to trade at that price. You can decide either to match their prices, which will result in a matched trade, or submit your own orders which will rest in the order book until someone matches your price (if they ever do). This is a financial market—this means that the larger amounts you want to buy or sell, the worse the prices will be. This is unlike a supermarket where you get a discount for buying in bulk.
In Working of Bitcoin Exchange, this is confusing for some people initially, but it is easily explained. When you buy something on an exchange, the exchange will naturally match you off with the person who is selling it at the cheapest price. When you’ve bought all that they have to offer, you have to find the next best price, which will be slightly higher.
In Working of Bitcoin Exchange selling uses the same logic: when you sell something, the exchange will match you with the person who is willing to pay the highest price for it. When you have sold as much to them as they want to buy, you will have to go to the next highest price which will be slightly lower
In the crypto tutorial session on Working of Bitcoin Exchange, we take the session further with how exactly a Crypto Exchange makes its money through the transactions.
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