After learning about the basics of bitcoins, the inevitable next phase of jumping into the world of bitcoin is figuring out how to buy and sell bitcoin. In other words, how to acquire and exchange them for other currencies, such as the US Dollar. Bitcoins can be exchanged, either bought or sold, in two main ways—online exchanges or in person. Each method has benefits, disadvantages, and risks. But as the technology matures, we’ll see the exchange of bitcoins become easier and more secure.
Buying and selling bitcoins through online exchanges is the most popular way of getting bitcoins and cashing them out for other currencies. These exchanges operate much like Forex markets (worldwide markets where currencies are traded against each other), in that they allow trading 24 hours a day, but unlike Forex exchanges, bitcoin exchanges operate 24 hours a day every day of the year. These sites are able to operate in this way because there are no physical items that must be delivered or traded, and due to the nature of the internet there is always someone somewhere who is looking to trade bitcoins.
Advantages: Once your account is funded, the transactions are instant. You can buy at market prices or set your own price to buy or sell, called limit orders. Different sites allow trading against different currencies. Some only trade in limited currencies, based on which country they’re located in. While others, such as Mt. Gox, trade in a wide variety of other currencies. Still, a few others specialize in trading against various cryptocurrencies and have limited trading pairs against state issued currencies, such as BTC-e. Reputable exchanges have the resources to create secure environments in which to store your currencies. Most of them also offer 2 Factor Authentication (2FA), using one time passwords as an extra layer of security to access your account. This extra factor is absolutely necessary, so if an exchange doesn’t offer this, avoid it. If the site does offer it, you need to take advantage.
Disadvantages: The biggest disadvantage to digital exchanges is the barrier to getting started. Many of them make it easy to get started with basic information about yourself, but once you start withdrawing (whether bitcoins, US Dollars or any other currency) they’ll begin to demand more information, locking up your money until you fork it over. The sites aren’t extorting people, they’re just trying to stay in business complying with a myriad of local laws, laws of the countries they’re accepting customers from, and international Anti-Money Laundering (AML) standards. It can take a couple days to verify your identity, using scanned documents such as proof of residence and government issued identification. Security is also an issue. While the larger sites go through painstaking lengths to ensure the security of their sites, no exchange is 100% safe. All of the major exchanges have experienced at least one large attack in one way or another.
Major Online Exchanges:
Coinbase – The largest online exchange in the world adding thousands of user daily. They offer a small but good selection of crypto based currency includint Bitcoin, Litecoin, and Ethereum.
Bitstamp – Since Mt Gox has historically been the largest exchange, it’s also been the target of the most attacks, which has affected their exchange rates. Businesses and individuals who depend on accurate exchange rates have started moving to BitStamp to get their data.
BTC-e – BTC-e makes it easy to get started, allowing trading against many other currencies (cryptocurrencies, Euros, Rubles, and US Dollars). They have a huge variety of options for funding/withdrawing. This company is located in Bulgaria.
In terms of retaining privacy and trust in the transaction, exchanging in person is the way to go. You always know where your bitcoins are, you aren’t trusting them to be held by a third party, and there isn’t the possibility of your transaction randomly being locked up because a site feels it’s suspicious. There are a few sites which arrange person-to-person exchanges, such as Local Bitcoins. A popular way of conducting these exchanges is at bitcoin meetups, where groups of local bitcoin enthusiasts and inquirers get together. Trading is popular during these meetings and can be diverse, often exchanging bitcoin for precious metals or food as well as cash. In-person exchanges are an area which will see considerable growth as bitcoins become more popular. For example, in Canada, there’s a bitcoin ATM, so you don’t have to use online exchanges or trust other people to trade.
Advantages: As mentioned above, when buying bitcoins, this is the best way to do it anonymously, maintaining privacy. It also presents the fewest regulatory barriers to getting started. Just as importantly, is the instantaneous action of getting cash or whatever else in hand. With online exchanges, withdrawals can take days to clear. It’s easy to arrange local meetups either on social media sites or classified sites.
Disadvantages: The most obvious disadvantage is finding people who wish to conduct trades. Even when you do find someone, they might not agree on the size of the transaction, or the exchange rate. Additionally, you may not know who you’re conducting business with, so issues of trust might arise. However, there are sites which work to facilitate these in-person transactions by connecting users, and incorporating trust systems. It’s often recommended to use escrow services to eliminate trust issues between traders.
Sites for In-Person Exchanges:
LocalBitcoins – This is the largest site for enabling users to conduct in-person trades. Provides a trust system to help users gauge the trustworthiness of the other party.
Bitcoin-OTC – While not specifically a site to meet up and trade, it allows for any type of exchange. It uses Internet Relay Chat (IRC) to connect users and GPG keys to verify authenticity of users during trades. If that sounds complicated, it’s because it is. It takes a little bit of reading to get started if you’re not familiar with IRC or GPG keys, but it’s worth it. It is probably the strongest and most comprehensive way to rate and judge trading parties.
Since Bitcoin is still fairly new, these systems will expand, become easier and more secure. We’ll see expansion of systems like the bitcoin ATM and adoption of bitcoin as payment at large companies and banks, giving incentive to improve the ways people can exchange their coins.