A Bitcoin exchange is an online marketplace where traders can buy and sell Bitcoin using fiat currencies and altcoins.
These platforms essentially function as matching engines that are used to safely match the orders of those looking to buy Bitcoin with those looking to sell, while acting as an intermediary to ensure trades are completed without issues.
Bitcoin exchanges can be split into 3 main categories:
Depending on what you want to use the exchange for, you’ll be better suited with one category, or the other. For example, if you’re looking to buy Bitcoin as a long-term investment, then spot exchanges are the better fit for you.
How Bitcoin exchanges work
For the most part, Bitcoin exchange platforms are designed to be as accessible as possible, which makes it easy for new investors and inexperienced traders to quickly get to grips with their features.
Usually, Bitcoin exchanges works by allowing users to browse a variety of different digital currency markets, including those for Bitcoin, and often altcoins and stablecoins too. Once a market is selected, traders will then be able to use the order options to create limit or market orders to open a buy (bid order) or sell (ask order) on the order book.
Market orders are filled automatically at the best available rate, whereas limit orders offer more flexibility and will be filled when the market conditions reach those specified in the order.
Depending on the platform you use, the exchange will usually offer either crypto to crypto trading, fiat to crypto trading or both. As the names imply, an exchange offering crypto to crypto trading allows you to trade one cryptocurrency against another, e.g. BTC/ETH, whereas fiat to crypto trading allows you to trade fiat currencies against cryptocurrencies, e.g. BTC/USD.
These platforms can also be divided into two types: spot and derivatives exchanges. Spot exchanges are the most common type and allow traders to directly trade cryptocurrencies, whereas derivatives exchanges are more complex platforms where users trade derivatives like futures and options which track the value of an underlying cryptocurrency and are settled at a later date.
For the most part, those looking to trade Bitcoin for the first time will likely be best served by spot exchanges, whereas more advanced traders that need to trade on leverage or require increased order flexibility may prefer to trade on a derivatives exchange.
Getting started on an exchange usually requires a simple registration process which takes just minutes. After that, if you are using a crypto to crypto exchange, you may need to top up your balance using your external wallet, or add your debit/credit card to the exchange for fiat to crypto purchases.
Things to keep in mind
Exchanges charge fees
As businesses, digital currency exchanges make money by charging customers a small fee on each of their trades. For the most part, these fees are usually very low when buying Bitcoin with another cryptocurrency, but can be much higher when purchasing with a credit card, debit card or wire transfer.
The two most common types of fees you will encounter when buying digital currencies like Bitcoin are maker and taker fees. In short, taker fees are charged to trades that remove liquidity from the market, whereas maker fees are charged for orders that add liquidity to the market. Generally, the taker fee will be larger than the maker fee, though some platforms do charge a flat fee regardless of whether you are a maker or taker.
Depending on the liquidity of the exchange, you might also want to consider the spread. This is the difference between the lowest ask price and the highest ask price on a particular trade pair.
A high spread can indicate you get less digital currency for your money, an issue typically found at trading platforms with poor trading volume.
Besides charging a fee on each trade, some trading platforms also charge a withdrawal and/or deposit fee. Deposit fees are usually very small and only applied to deposits below a certain threshold, while withdrawal fees usually closely reflect the mining fee needed to ensure transactions are confirmed relatively quickly. You will only need to pay withdrawal fees if you with your funds to your external Bitcoin address.
For example, if you are looking to buy two bitcoin at $10,000 each, and the exchange charges a 0.5% fee, then your fee can be calculated as ($10,000 * 2) * 0.5% = $100. This is charged on top of the $20,000 used to actually acquire the bitcoin, so your total expenditure would be $20,100.
Most cryptocurrency exchanges require identity verification
Identity verification, or more commonly known as KYC (know your customer) and AML (anti-money laundering) verification is a process many Bitcoin exchange platforms employ to comply with regulations and prevent the use of cryptocurrencies for illegal purposes.
KYC requirements are mostly seen at cryptocurrency exchanges that have a fiat on-ramp, allowing customers buy cryptocurrencies with fiat currencies. Some examples of these include Coinbase, Coinmama, Bitit, and Kraken.
With that said, many exchange platforms allow unverified users to buy or sell a small amount of cryptocurrency without passing KYC checks.
Although completing identity verification is generally considered to be a hassle, the process usually doesn’t take long and only needs to be done once.
For the most part, KYC checks will involve answering some basic identity questions, such as your name, current address and resident country, and you will also need to upload some proof of identification—typically a passport, national identity card or driver’s license. Some platforms also ask for a recent utility bill and a selfie as further proof of your identity.
Oftentimes, these documents are automatically processed, leading to near-instant verification, whereas some platforms still manually these documents before verifying your account.
Exchanges are not always safe
As the cryptocurrency trading industry has grown in recent years, many exchanges are now used to store huge amounts of cryptocurrencies. Unfortunately, this increased popularity has also led to unwanted attention from hackers, who seek to exploit loopholes in the way some of these platforms store user funds to commit theft.
For the most part, these hacks tend to affect newer, less secure platforms, though several major cryptocurrency platforms have also fallen victim to hackers. For example, Bitfinex—currently considered to be one of the most reputable exchanges—has been hacked twice since it opened in 2012. Likewise, even the world’s most liquid spot exchange Binance was hacked for $40 million in 2019.
Fortunately, customers were eventually reimbursed for both of these cases, but not every hack has a happy ending. Likewise, there are also cases where the exchange operators simply up and leave with customers funds, including the recent PlusToken exit scam, which saw a reported $2.9 billion worth of digital currencies stolen. The funds are rarely recovered in these situations.
With that said, although the majority of digital currency platforms employ strict security protocols to keep your funds safe, we only recommend keeping the funds you intend to trade with on these platforms. Any excess should be withdrawn to a more secure external wallet, such as a hardware wallet.
Example of a trade on a Bitcoin exchange
To help clarify exactly how to trade Bitcoin, we will run through a quick example.
Let’s suppose you want to place a market order for 5 bitcoins and the current going rate is around $10,000 each. By placing a market order on a cryptocurrency exchange for 5 BTC, you will buy 5 BTC at the lowest available ask price available in the order book.
For example, if there is 3 BTC available at $9999.90 and 10 BTC available at an ask of $10,000, then the first three bitcoins of your order will be filled at $9999.90, whereas the remaining two will be filled at $10,000. As such, the total cost of buying 5 BTC would be $49,999.70 (3* $9999.90) + (2* $10,000), plus the associated market taker fee as described earlier.
Alternatively, if you think Bitcoin is likely to decrease in price and want to buy it at a lower value, then you can instead open a limit order. As an example, if Bitcoin is currently worth $10,000, but you think it will drop to $9,500, you can place a limit order of $9,500 that will be added to the order books. This order will only be filled if Bitcoin does indeed drop to $9,500 or below. Once filled, you would need to pay a maker fee on top of the cost of buying the Bitcoins.
Although most Bitcoin exchanges can be considered centralized platforms, a large number of decentralized exchanges have appeared in recent years.
Decentralized exchanges differ from their centralized counterparts in that they have no central authority but still allow the safe peer-to-peer trading of digital currencies like Bitcoin. Most decentralized exchanges are non-custodial, which means traders retain full control over their cryptocurrencies and are hence less at risk of theft.
Beyond this, decentralized platforms typically require less personal information from users and can be used in countries where centralized platforms are restricted, such as the United States and China.
However, these trading platforms are often much slower and less intuitive than centralized platforms and typically suffer from relatively poor liquidity. Likewise, a lack of advanced trading tools and derivatives can make them unsuitable for professional traders.
Nonetheless, if privacy and security are your primary concerns, then decentralized cryptocurrency exchanges are likely the way to go. Likewise, Bitcoin mining is another private way to obtain BTC.
Smart contract exploits are more ethical than hacking… or not?
There has been a lot of talk about the recent “hacks” in the decentralized finance realm, particularly in the cases of Harvest FInance and Pickle Finance. That talk is more than necessary, considering hackers stole more than $100 million from DeFi projects in 2020, accounting for 50% of all hacks this year, according to a CipherTrace report.
Some point out that the occurrences were merely exploits that shined a light on the vulnerabilities of the respective smart contracts. The thieves didn’t really break into anything, they just happened to casually walk through the unlocked back door. By this logic, since the hackers exploited flaws without actually hacking in the traditional sense, the act of exploiting is ethically more justifiable.
But is it?
The differences between an exploit and a hack
Security vulnerabilities are the root of exploits. A security vulnerability is a weakness that an adversary could take advantage of to compromise the confidentiality, availability or integrity of a resource.
An exploit is the specially crafted code that adversaries use to take advantage of a certain vulnerability, and to compromise a resource.
Even mentioning the word “hack” in reference to blockchain might baffle an industry outsider less familiar with the technology, as security is one of the centerpieces of distributed ledger technology’s mainstream appeal. It’s true, blockchain is an inherently secure medium of exchanging information, but nothing is totally unhackable. There are certain situations in which hackers can gain unauthorized access to blockchains. These scenarios include:
- 51% attacks: Such hacks occur when one or more hackers gain control of over half of the computing power. It’s a very difficult feat for a hacker to achieve, but it does happen. Most recently in August 2020, Ethereum Classic (ETC) faced three successful 51% attacks in the span of a month.
- Creation errors: These occur when security glitches or errors go overlooked during the creation of the smart contract. These scenarios present loopholes in the most potent sense of the term.
- Insufficient security: When hacks are done through gaining undue access to a blockchain with weak security practices, is it really as bad if the door was left wide open?
Are exploits more ethically justifiable than hacks?
Many would argue that doing anything without consent cannot possibly be considered ethical, even if worse acts could have been committed. That logic also raises the question of whether an exploit is 100% illegal. For example, having a U.S. company registered in the Virgin Islands can also be seen as performing a legal tax “exploit,” though it isn’t considered outwardly illegal. As such, there are certain gray areas and loopholes in the system that people can use for their own benefit, and an exploit can also be seen as a loophole in the system.
Then there are cases such as cryptojacking, which is a form of cyberattack where a hacker hijacks a target’s processing power to mine cryptocurrency on the hacker’s behalf. Cryptojacking can be malicious or nonmalicious.
It may be safest to say that exploits are far from ethical. They are also entirely avoidable. In the early stages of the smart contract creation process, it’s important to follow the strictest standards and best practices of blockchain development. These standards are set to prevent vulnerabilities, and ignoring them can lead to unexpected effects.
It is also vital for teams to have intensive testing on a testnet. Smart contract audits can also be an effective way to detect vulnerabilities, though there are many audit companies that issue audits for little money. The best approach would be for companies to get several audits from different companies.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Pawel Stopczynski is the researcher and R&D director at Vaiot. He was previously the R&D director and a co-founder at Veriori and at UseCrypt. Since 2004, Pawel has been involved in the development of 18 IT projects in Poland and the United Kingdom, focusing on the private sector. He was a speaker at several IT conferences, and the organizer of two TEDx conferences. For his work, Pawel was awarded a gold medal at the Concours Lépine International Innovation Fair 2019 in Paris, and a gold medal of the French minister of defense.
Close to $10 Billion Worth of Crypto Longs Wiped off the Market Amid Sudden Crash
It’s been a rough Sunday for the cryptocurrency market.
$7.8 Billion Liquidated in an Hour
The “up only” sentiment in the digital asset market took a major hit today as more than $7 billion in crypto long positions were liquidated within an hour in a sudden market wide crash.
According to data from bybt, more than $9 billion worth of crypto long positions were liquidated in the past 12 hours while more than $8 billion were wiped off the market in the last 4 hours.
Specifically, bitcoin’s price started trending downwards early Saturday but the sharp free fall commenced around 3:00 UTC on Sunday.
After recording new ATH day after day, bitcoin and other cryptocurrencies’ price witnessed a steep downfall today almost touching the $50,000 mark. At the time of writing, bitcoin has regained some support and trades at $55,300.
According to crypto analyst Lark Davis, bitcoin breached the 50-day moving average during the unanticipated crash which is a rare event during a bull run. For context, BTC breached the 50 day MA only a few times during the 2017 bull market. In retrospect, all such dips proved to be immensely profitable buy opportunities.
Overleveraged Longs get REKT
While it typically pays to long in a bull market, investors must be cautious of too much optimism and avoid being long in an already overbought market to not get rekt in sudden market crashes like that of today.
Being long in a market with less liquidity is particularly dangerous as the order books are thin and a sudden dump can cause the price of the underlying asset to go down much more than in other liquid markets.
The Block’s Larry Cermak noticed this on Perp Protocol where the price of ether (ETH) reached as low as $900 due to low liquidity.
Crypto derivatives exchange FTX’s CEO Sam Bankman-Fried share some interesting facts about the exchange during today’s crash.
According to SBF, the exchange witnessed trading volume close to $26 billion which was another all-time record volume day for FTX. At the same time, FTX had close to $250 million of liquidations today.
Kraken Daily Market Report for April 17 2021
- Total spot trading volume at $2.51 billion, 57% above the 30-day average of $1.6 billion.
- Total futures notional at $667.9 million.
- The top five traded coins were, respectively, Bitcoin, Dogecoin, Ethereum, Tether, and Siacoin.
- Strong returns from Nano (+51%) and Siacoin (+20%).
|April 17, 2021
$2.51B traded across all markets today
Crypto, EUR, USD, JPY, CAD, GBP, CHF, AUD
#####################. Trading Volume by Asset. ##########################################
Trading Volume by Asset
The figures below break down the trading volume of the largest, mid-size, and smallest assets. Cryptos are in purple, fiats are in blue. For each asset, the chart contains the daily trading volume in USD, and the percentage of the total trading volume. The percentages for fiats and cryptos are treated separately, so that they both add up to 100%.
Figure 1: Largest trading assets: trading volume (measured in USD) and its percentage of the total trading volume (April 17 2021)
Figure 2: Mid-size trading assets: (measured in USD) (April 17 2021)
Figure 3: Smallest trading assets: (measured in USD) (April 17 2021)
#####################. Spread %. ##########################################
Spread percentage is the width of the bid/ask spread divided by the bid/ask midpoint. The values are generated by taking the median spread percentage over each minute, then the average of the medians over the day.
Figure 4: Average spread % by pair (April 17 2021)
#########. Returns and Volume ############################################
Returns and Volume
Figure 5: Returns of the four highest volume pairs (April 17 2021)
Figure 6: Volume of the major currencies and an average line that fits the data to a sinusoidal curve to show the daily volume highs and lows (April 17 2021)
###########. Daily Returns. #################################################
Daily Returns %
Figure 7: Returns over USD and XBT. Relative volume and return size is indicated by the size of the font. (April 17 2021)
###########. Disclaimer #################################################
The values generated in this report are from public market data distributed from Kraken WebSockets api. The total volumes and returns are calculated over the reporting day using UTC time.
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