So you’ve decided to begin your journey into cryptocurrencies, whether it’s using coins to buy or sell services and products, or investing and hopefully increasing your portfolio. Maybe you just want to help a particular currency grow or you’d like to get in on some of the newer altcoins as early as possible. Whatever your end goal may be, you will have a rough time taking part in this amazing technology without going through an exchange first.
Your very first step if you’d like to invest in a cryptocurrency such as bitcoin or Ether is to register for and start using an online exchange specialising in your cryptocurrency of choice. Learning what exchanges are, how to use them and how to pick the best possible exchange for your needs should be your number one priority, so let’s get to it.
Compare cryptocurrency exchanges available in Hong Kong
What is an exchange?
Because cryptocurrency coins like bitcoin only exist on a software platform called the blockchain, there are only two ways to acquire them: the first is to get paid in that cryptocurrency for a product or service that you’ve provided, and the second is to buy some coins from an exchange.
Online exchanges, just like their brick-and-mortar counterparts, exist to provide one core service: allowing the conversion of one currency to another. In this case, they allow you to convert fiat currency (USD, EUR, etc.) to a cryptocurrency carried by the online exchange (BTC, ETH, etc.) and vice-versa.
Where are my coins stored?
The very first thing you’ll notice after registering with an exchange, and going through the verification process that the more reputable exchanges have in place, is that you are immediately provided with a wallet. This wallet usually has a public address, just as you would find with any other software wallet. It often allows you to send and receive coins to and from other wallets, usually your own desktop, mobile or other type of wallet.
A wallet is a piece of secure software that connects to the blockchain and lets you take three primary actions:
- Check your balance. The wallet connects to the blockchain and tallies all your transactions to give you a final balance of coins in your possession.
- Send coins. Using the recipient’s public key, ie, the wallet address, you can send coins from your wallet to your recipient. Transactions are often virtually instantaneous and nearly anonymous.
- Receive coins. Your wallet provides you with an address which you can give to anyone you’d like to receive coins from. Some wallets even give you multiple public addresses including one-time-use addresses for security.
There are many types of wallets, from those that reside on your desktop computer to ones you can print out on a piece of paper.
The wallet provided by an exchange is, for all intents and purposes, not owned by you, but by that exchange. For this reason, it’s good security sense to immediately transfer coins out of your exchange-provided wallet and into a more secure wallet that you own. In the case of hacks you might lose everything you own and coins in an exchange wallet do not give you any benefits (for example, XEM coins in an exchange wallet do not get vested for you, but for the exchange).
Exchange transaction fees
Currency exchanges, like other businesses, need to make a profit and their profits come from transaction fees. There are as many types of fees and fee structures as there are exchanges, but the most common variants are:
- Fixed fee. Sometimes exchanges charge a fixed amount per transaction, ie, when you’re converting to cryptocurrency, and again if and when you convert back to fiat. For example, if the exchange charges $5 per transaction and you buy $100 worth of bitcoin, you will actually be receiving bitcoin worth $95. The balance of $5 is kept by the exchange. While not uncommon, this is less common than the percentage fee.
- Percentage fee. Most exchanges charge a percentage fee, and it works in a similar way to the fixed fee, except that it varies according to the size of your transaction. For example, if an exchange charges 1.5% per transaction, it would charge you $1.50 for buying $100 worth of bitcoin, leaving you with $98.50. Meanwhile, if I were to buy $5,000 worth of bitcoin, the exchange would pocket $75 out of that transaction.
- Spread. More commonly used in trading platforms, spread is best described as the variance in the cost between buying and selling a currency. For example, an exchange might sell BTC at $4,023 but buy BTC at $4,021. The remaining $2 BTC is the spread, and it’s how the exchange makes money.
Percentage fees and fixed fees are often used together in various tiers. For example, an exchange might charge 2% per transaction with a minimum of $0.30. Or it could charge $5 for transactions up to $100, 1.5% for transactions up to $5,000 and 0.9% for anything above that. Whatever the case, it’s extremely important to read through your chosen exchange’s transaction fee structure to make sure you’re not losing money in the long term.
How do I exchange fiat for coins?
Exchanges typically have their own specific process of converting fiat currency to cryptocurrency and back, but the general process remains the same. We’ll use a fictitious exchange called LiteExch as an example.
- Let’s say you have $100 to invest in Litecoin. You’ve shopped around and chose LiteExch for your exchange. You like their interface, they carry Litecoin (LTC), they have low transaction fees and a lot of good reviews.
- After creating an account with LiteExch you are asked to upload a photo of your passport or driving license for verification. You go through the process and get verified. Now you’re ready to buy some Litecoin.
- You find the Buy/Sell section on LiteExch’s website and you select “Buy” (because you’re buying Litecoin), choosing AUD as your source currency and LTC for the currency being purchased.
- Next you enter $100 into the amount input field, enter your credit card details and click the “Next” button.
- LiteExch now shows you the fees. LiteExch charges 1%, with a $1.50 minimum. Because you’re only buying $100 worth of LTC, 1% would come out to $1.00, so you will be charged the minimum of $1.50 instead.
- The amount of LTC which you will be buying is now shown on your screen. While LTC is trading at $62.50/LTC, you will not be buying 1.600 LTC. Instead you will be getting 1.576 LTC because the exchange will keep $1.50 of your initial $100.
- After proceeding with the payment, you now have 1.576 LTC in your exchange wallet.
Exchanging cryptocurrency back to fiat is precisely the same as the above process, but with the currencies reversed.
The three different types of exchanges
While each has its own method of doing things, exchanges generally fall into one of three different categories:
These exchanges have the most in common with regular, brick-and-mortar currency exchanges. They provide a fixed price for the currencies that they trade in (which fluctuates with the average price of the coin but is generally higher when buying, cheaper when selling) and they guarantee that your order will go through. They are the simplest to use but often have the highest fees.
Similar to Forex trading platforms, these exchanges allow users to buy and sell currencies from and to each other. They also usually have charting software, to assist users in better analysing the history of the price of a coin, and to help predict where it’s going to go. Trading platforms usually have lower fees because there are far more transactions happening on trading platforms than on broker exchanges. The price of the coin is set by the market.
Acting almost like middlemen, these exchanges allow users to trade currencies but, unlike trading platforms, the users set their own prices and do not have a fixed market rate. This is the least common exchange as it is more susceptible to fraud than other platforms.
Choosing an exchange and what to look for
Exchanges come in various shapes and sizes, from those that offer multiple levels of security to exchanges that don’t even ask you to create an account. So when you’re about to choose an exchange, it’s best to look at its features and go from there.
As already discussed, transaction fees vary wildly from exchange to exchange. Whether it’s a fixed plus percentage fee, or tiered levels of different fees, it’s important that you read through and understand how much money you’ll be charged when you deposit, withdraw and exchange. Fees can pile up if you’re not careful.
A coin gaining 10% might seem like a lot, but if you’re paying more fees than you’re making profit you could be losing money without being entirely sure how.
If an exchange does not publicly post its fees or if the information is not easily found, steer away.
Exchanges accept all sorts of payment methods, from credit and debit cards to bank transfers, but not all exchanges accept all the various payment options. Also note that some exchanges might accept one payment method for withdrawal, but not for deposits, perhaps because of the risk of fraud.
Finally, make sure to check the fees for the various payment choices. Most exchanges will charge higher fees for credit card transfers.
Exchanges sometimes have limits on how much currency you can purchase and own. Most of the time, these are upper-bound limits, for example, you can’t purchase more than $1,000 of currency. However, there may also be limits on the lower end, for example, a minimum of $10.
It’s always important to keep your goals in mind when choosing an exchange. You don’t want to start pouring money into an exchange only to find out you can’t expand your portfolio because you’ve reached the limit.
Cryptocurrencies have grown considerably, but their technology is tested by hackers every day, and it’s mostly the bigger exchanges that take the brunt of these attacks. This doesn’t mean that those large exchanges don’t deserve your investment. On the contrary, an exchange that has survived multiple hacking attempts is often safer than one that has yet to be tested.
What you need to check for is whether it’s ever been hacked before, or at least, how many times it has and how much money was lost.
Additionally, always read online reviews as they will help you choose a safe exchange to put your money into, while you hold onto your peace of mind.
Now that you know everything you need to know about getting your feet wet with cryptocurrency exchanges, it’s time to start shopping around for one.
Most importantly, always keep in mind the various aspects of exchanges discussed in this guide: security, limits, payment methods and fees. If you’re unclear about any of these when looking at an exchange, it’s best to steer clear of it, especially if you’re going to keep a large amount of money in the wallet provided by the exchange.