Digital Asset Exchanges are the central services through which you’re able to trade or “invest” into “crypto” systems. They provide a safe, secure and manageable system through which you’re able to buy “crypto” tokens from other people…
There are a large number of “crypto” exchanges – with CoinBase being the most popular by far. This exchange also allegedly recorded revenues of just over $1bn last year (2017), due primarily to the massive influx of retail traders buying up the various “crypto” tokens.
Whilst each “crypto” service has its own quirks, the most common traits are that they will typically only provision the trade of “Bitcoin” for “fiat” currency. Most systems will not touch “alt” coins because they have such low values, and such volatile prices.
To this end, two types of exchange have grown – fiat/crypto and crypto/crypto.
The likes of Binance – for example – give you the ability to trade crypto/crypto, not permitting any fiat transactions at all. Therefore, if you wanted to buy “Litecoin” or something, you typically have to buy Bitcoin through the likes of CoinBase, and then transfer the BTC into Litecoin via Binance.
Unlike traditional “currency” exchange services, the “crypto” exchanges do not handle the currencies directly. Whilst it’s true that they will store the tokens in their infrastructure, it’s almost always the case that they will actually just act as a “wallet” for you – meaning that when they find a buyer, they trigger the sending process without you having to do anything.
The way that traditional currency exchanges work is to act as any business would – “buying” currency as a set of inventory, selling it to retail users as required.
Unfortunately, this sort of “centralized” model does not work well within the decentralization space, partly due to the technical difficulties of managing ownership, but also due to security reasons.
As was aptly demonstrated by the MtGox fiasco (through which $450m+ worth of BTC were “lost”), storing a large amount of crypto tokens in a central server stack is actually very ineffective and dangerous. To this end, most services, such as Coinbase, work as an intermediary between buyer/seller (not as the means of exchange itself).
To better understand how these services work, the following tutorial is going to outline their role, processes and ultimately how they aim to provide users with the ability to quickly make purchases with “crypto”.
What Is “Crypto” Trading?
The underlying reality is that “crypto” is basically a decentralized “payment network”.
Rather than what most people’s [misconception] is – the value service is basically determined by who/how you can “send” money overseas. For example, because of the lack of financial regulation – you’re able to “send” Bitcoin to people in China or Africa even though there may be legal restrictions against this.
The legality of sending/using “crypto” systems has caused controversy – especially in China & S.Korea, where local Bitcoin exchanges & mining have been banned by the government.
Whilst the usage of Bitcoin has not been prohibited, the way in which the system is able to provide users with the ability to transact with anyone with a “Bitcoin” address has prompted many banks & financial institutions to become weary of the system (as it cuts them out completely).
The cornerstone of the idea is that you can “send” Bitcoin (or other “crypto” tokens) to others through the Internet. It’s like sending an email – as long as you have someone’s “Bitcoin Address”, you’re able to send them some of the tokens you may have.
As mentioned, the “tokens” in themselves are worthless (they’re files) – the difference lies in how they’re able to give you the ability to buy/pay for things that you couldn’t before.
For example, because the Bitcoin network is entirely decentralized, you don’t need any central bank to ratify any transaction (it’s all handled with the BTC network). Thus, you’re free to buy products much cheaper than you would have been paying otherwise (as you don’t need to pay for the 1,000’s of bank operators who work behind the scenes of central clearing houses)…
The most important thing to realize is that “Bitcoin” is not a “currency”.
Well… it is but it doesn’t hold any intrinsic value – which means that using it as a “store of value” is entirely dependent on what the “market” sees its price as. The underlying value of Bitcoin lies in its transactability, hence why most people only care about it (and not the likes of Ethereum etc).
To this end, when transacting with Bitcoin, what you’re really doing is paying someone else for the privilege of using the BTC network. The number of “Bitcoin” tokens has been limited to 21 million, meaning that only 21 million people could own one of them.
Obviously, this isn’t how it works, with around 4% of the BTC user base owning around 95% of the “coins” (Satoshi Nakamoto – the system’s creator owns around 1,000,000)…
This means that if you want to “send” money through the system, you have to either “buy” a token from someone who owns them, or “mine” them. Mining is more-or-less out of the question now, due to the way in which the calculations have become extremely difficult, which leaves “buying” the tokens.
This is where exchanges come in, and is how you are able to “invest” into the system.
Buying and selling the “tokens” for the various systems means that you’re able to obtain the tokens (which you can either send to your transaction partners), or keep them for a future date.
The “keeping them for a future date” is basically where the “investment” side of things comes from, and why most people end up “holding” onto their BTC holdings, rather than spending them (hence why most people have suggested the system is more akin to Gold than liquid capital).
Investing Into Bitcoin
Thus, to consider “investing” into “Bitcoin” (or the other “crypto” systems), you’re basically looking at how to buy the “tokens” cheaply, and then hold onto them whilst the price increases…
Obviously, no-one wants to be a sucker, and thus most people have been waiting to get a higher price for their Bitcoin holdings. Since the early-2018 “crash”, the price has bottomed-out of the market, and thus the majority of people who didn’t sell are just waiting for the next rally to start.
Unfortunately, the may be waiting for some time – as most people who originally “bought” the Bitcoins back in 2017 were oblivious to how the system actually works. To this end, it’s important to remember that the only way the price grew was the increase of “greater fools” paying more & more for the various files.
If you want to “invest” into BTC today, you have to go to an “exchange” and play a buy order. This will allow sellers to make a decision on whether they’re able to achieve the price they want, through which they’re able to provide the most effective profit.