Bitcoin 108 (101 part 8): exchanges, brokers and merchant tools
Wednesday 27 July 2016
Bitcoin users can turn their virtual coins into real-world currencies like dollars and Euros through exchanges and other means.
In the same way that one national currency can be used to buy another, bitcoins can be used to trade other digital currencies, or against fiat currencies like dollars and Euros. There are a number of ways of doing this, and the process can be automated so that online stores can be guaranteed to receive the price at the time the money is sent.
Exchanges and brokers
Bitcoin exchanges allow users to trade their bitcoins against national currencies like the dollar (against which bitcoins are most often valued), at whatever rate other buyers and sellers are willing to pay.
Exchanges offer traders more options, but are more complex to use than brokers for everyday customers
Exchanges like Bitstamp and Bitfinex typically require users to satisfy money laundering regulations by registering and sending proof of address and identity before allowing them to trade. They are bound by law to do this. Exchanges match buyers and sellers, and take a small commission fee for executing the trade (typically 0.5% or less). You will have to send funds to the exchange from your bank account or bitcoin address, and withdraw them after you have finished trading.
Brokerages like Circle work on a similar basis, except that instead of matching buyers and sellers, users trade with the company itself. The broker makes its money through the ‘spread’, or the difference between the price at which they buy bitcoins and sell them. Funds are typically sent straight back to your account at the moment of purchase, and are not held by the brokerage.
Brokers are more straightforward for customers to use, since they quote a single price at any given time and buy/sell at that rate. However, they do not allow users to set price targets and trade for profit very easily.
Many merchants who accept bitcoins for goods and services, whether online or through a physical store, want to convert them to a regular currency immediately to avoid any fluctuations in value that may occur (which may go in their favour, but equally may leave them out of pocket).
Merchant tools offered by some exchanges and other companies like BitPay allow stores to integrate bitcoin conversion within their websites and point-of-sale terminals. As well as providing instructions to allow customers to pay in bitcoin, these may immediately sell and bitcoins received and hold them in an account, to be withdrawn into their bank account whenever they want.
This process means it is possible for merchants to accept bitcoin payments without having to worry about issues such as the changing value of the currency; setting up bitcoin wallets; and maintaining security.
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