How do I buy Bitcoin? And how do cryptocurrency exchanges work?

We’ve come a long way since the days when wanting to buy Bitcoin required knowing someone

28 June 2019 - 08:56
Bitcoin exchanges make it easy for traders to buy the currency, and they’re open 24 hours.
Bitcoin exchanges make it easy for traders to buy the currency, and they’re open 24 hours.
Image: Supplied/Luno/Unsplash

Before exchanges, getting hold of Bitcoin was a lot more complicated

You couldn’t just open a simple app and decide how much you wanted. At the very beginning, the easiest option was to load the Bitcoin software on a spare laptop and mine your own. Or you could find someone willing to sell directly to you (in person with cash, or online) or even give it to you for nothing.

Times have changed and we need a simpler and safer option to bring access to more people. 

Buying Bitcoin now

Nowadays, there are apps like Luno that make it easy to buy cryptocurrencies directly from your wallet without having to use an exchange. This is known as Instant Buy and Sell and works similarly to making a purchase online. 

You pay a fee for the convenience as the provider uses the exchange to give you the best rate before instantly completing your order. Most people prefer this method as it's safer and easier. On the other hand, seasoned traders tend to prefer exchanges -let's find out why. 

What’s an exchange?

A cryptocurrency exchange is simply a platform for matching buyers and sellers. They work in a similar way to exchanges for other assets, like stocks. People tend to refer to those who use them as “traders” because they often buy and sell in a short time frame. Traditionally, an “investor” is someone who holds their investment for a longer time frame. Bitcoin exchanges are best suited to those with plenty of trading experience.

Cryptocurrency exchanges are typically active 24 hours a day, seven days a week. By comparison, other types (such as stock exchanges) have set trading hours. Exchanges tend to charge a small fee, usually a percentage known as a “volume-based fee”. There may be a currency conversion fee if you deposit a currency not accepted by the exchange.

An exchange is not the same as a wallet, which is a place for digitally storing cryptocurrency once you’ve bought it. Some platforms provide both, and ones that don't would require traders to transfer their cryptocurrency elsewhere. It’s important to note that not all exchanges are the same. As the official Bitcoin website explains, they “provide highly varying degrees of safety, security, privacy and control over your funds and information”.

Buyers and sellers

To make a purchase, buyers must first fund their exchange account. They may use local currency or another cryptocurrency. They then place a “buy” order on the exchange, requesting to buy Bitcoin at anything below a maximum price.

For example, they might want 1 BTC at no more than R100,000. A seller places a “sell” order, offering to sell a certain amount of the Bitcoin for above a minimum price. This adds liquidity, meaning there’s more cryptocurrency available to buy on the exchange.

When someone places a buy or sell order, the exchange adds this to its “order book”. An order book comprises buyer and seller information, like the proposed prices they’re looking to buy or sell for. The exchange acts as a matchmaking service between the two.

For example, a trader might want to sell 1 BTC at no less than R100,000. The exchange would match them with a buyer looking to spend that much and the money would change hands. If the prices don’t match, no sale happens.

Supply and demand

A common misconception is that prices are set by the exchanges, but that's simply not the case. Exchanges don’t set prices. They act as intermediaries connecting buyers and sellers, with supply and demand dictating the prices. This is why you might see different prices on different exchanges, or different regions. There's no official global price of Bitcoin. 

While we recommend sticking to the instant-buy-and-sell option if you’re not a seasoned trader, you can take a look at the Luno Exchange any time. There's a fair amount of information to be found on the Exchange, including price charts viewable in three different formats:

  1. Candle chart  —  green and red vertical bars showing price changes during a specified time period, between five minutes and seven days, with grey bars denoting trading volume;
  2. Line chart —  a straightforward representation of price changes over a time period, between one day and two years; and
  3. Depth  chart —  showing orders waiting in the order book.

You can also see the order book, a form for placing an order, and a list of recent trades. 

If you’re interested in buying Bitcoin check out the Luno app and see just how easy it is to embark on your crypto journey. It’s never too late to get started.

Want to learn more? Read Luno's Bitcoin education series here.

For more information, visit the Luno website or follow on Facebook, Twitter, Instagram, YouTube and LinkedIn.

This article was paid for by Luno.