How To Use Bitcoin Exchanges: A Step-By-Step Guide

You finally decided that instead of buying more Tesla stock, you’re going to try your hand at cryptocurrency and diversify some of your investments.

Great. You’re excited, but as you look through currency exchanges on your traditional trading platform, you can’t find any crypto listings.

How to use Crypto Currency Exchanges

Hmm..

Where is this Bitcoin? What about that new one I keep hearing about? Will I have to go through shady underground forums to invest? Your excitement starts to turn into doubt and frustration as Google returns a myriad of confusing looking crypto websites.

Wait, most exchanges don’t even take USD or EURO? How do I make purchases? Does the exchange store and have control over my assets? Who do I trust?

The volume of information can be overwhelming. This is true to almost everything in the crypto currency realm right now, as people are trying different approaches to figure out what works best and create a more streamlined system ready for mass adoption.

So, where do you begin?

Luckily, people have already blazed the trail for newbie investors. I hope to build on top of that to narrow the focus even more.

My goal in this article is to help you navigate one of the more reputable exchanges in the US, as well as confidently and safely make crypto currency investments.

Even though I will attempt to explain this in the simplest possible way, there is going to be a learning curve, so go get yourself a strong cup of coffee, and let’s dive right in.

A brief history

It used to be that there were only a couple of crypto exchanges available, ranging from shady to shadier. As with most things, it took a major event – the collapse of the largest crypto exchange in 2014, Mt Gox, and the loss of millions of dollars, for the community to learn and for significant progress to be made. Exchanges truly focused on security and provided safeguards for themselves and their users. Regulation and scrutiny increased, and as a result, the most reputable exchanges rose to the top

Getting started with exchanges

 Getting started with exchanges

 

Today there are dozens of exchanges operating all around the world, many of them regulated and insured, and it’s safer than it’s ever been. There are still unsavory platforms around, and there always will be, so you have to do your research, but the general consensus is that the market is maturing, and as bigger players look to enter, more brainpower will go into ensuring that bad actors get weeded out early, a key step for mass adoption.

Exchanges that allow you to purchase crypto currency with FIAT (government issued money e.g USD), like Coinbase, Gemini, Kraken are subject to more rigorous compliance requirements such as  AML (Anti Money Laundering) and KYC (Know Your Customer). They must also be registered money transmitters and typically afford the highest levels of security and credibility due to their closer relationships with larger financial institutions, typically banks.

These are all good things, but the barrier to entry into the world of crypto currency is still relatively high. The platform Coinbase, which I review here, aims to make it much more accessible to the general public.

It’s nice to have options

I highly encourage you to go through the process of registering and verifying your accounts with multiple exchanges. Even if you only use one or two, you simply never know when you might want access to another.

It can take weeks for the verification process if there is a surge in signups, which happens each time there is a corresponding surge in the price of Bitcoin, and you don’t want to be caught in that.

Think of it this way: just like you most likely have accounts with UberEats, GrubHub, Postmates, Deliveroo (European and Asian readers) and others to order different types of food depending on your mood, availability etc, you want to have a similar approach to crypto exchanges. Nobody wants to have to register for a new service when they’re hungry. You just want your food.

Imagine the lost trading opportunities if you had to wait two weeks to register and verify. In crypto time, that could be 1000%.

Exchanges have different features, fees, policies and coin listings

Exchanges have different features, fees, policies and coin listings. Advanced users could also take advantage of price differences between exchanges to profit, called arbitrage (beyond the scope of this article). Finally, It’s just nice to have options.

The basics

If you plan on buying larger quantities of crypto, make sure that you pay particular attention to the weekly deposit limits. It’s easy to max those out, and it can be frustrating to have to wait for it to reset while missing out on the action. To remedy this, make sure you have the highest verification tiers for your accounts.

Something to be mindful of is that you should generally avoid keeping a lot of your crypto assets on exchanges unless you are actively trading them. Exchanges aren’t banks but many people rely on them to act in that capacity. I will cover how to be your own bank in detail in another blog post.

Finally, you absolutely must use Two Factor Authentication (often referred to as 2FA or MFA) when dealing with exchanges (you really should use it for every account that you have). This is an added layer of security that requires you to input a code after you provide your password. I recommend using Google Authenticator on your phone as it works with pretty much everything. Yes, it might be annoying at times, but it’s 100% worth the extra step to keep your investment protected, as it will be the only thing standing between your money and a hacker if your password is weak (which it likely is). I will walk you through this process for each exchange.

Sound overwhelming?

Luckily, you are in good hands and there are services out there that focus on making it easier and safer for everyday users to buy and sell crypto.

That’s where we will begin.

Disclaimer: This article is written from the point of view of an American citizen. Rules and regulations differ from country to country. These are my own opinions and I am not providing trading or legal/compliance advice. Do your own research!

Coinbase
Coinbase, has been around since 2012

One of the leading brokers in the space, Coinbase, has been around since 2012. It allows users in 32 countries to use traditional funds called FIAT (like the car) to purchase a growing list of crypto currencies. Currently trading is limited to Bitcoin, Ethereum and Litecoin.

Features and key points

Not the richest set of features, as it’s not a full exchange, Coinbase shines by making it easy to get an account up, verified and ready for crypto currency action. This is how I (and many newbies) first got my feet wet in 2013.

  • Newbie friendly
  • Supports many countries
  • Good customer support
  • Web and mobile apps
  • Can link bank accounts, wire money or use credit cards
  • US based
  • Insured
  • Easy to increase bank deposit limits
  • Higher than average fees
  • Not full exchange
  • Limited trading features

Interface and trading

Coinbase offers a simple to navigate layout.
Here is an example of the Buy/Sell dashboard:

Here is an example of the Buy/Sell dashboard

 

You essentially pick the crypto currency that you want (Bitcoin, Ethereum, Litecoin), the payment method (usually a linked bank account), and how much you want to buy. Coinbase will list fees for you and the availability of your crypto assets.

It’s important to note that if you use a linked bank account or credit card to make the purchase, the coins will not be available for you to trade, sell or move until the bank/credit card transaction clears. If you have FIAT (traditional money) available in the account, and use that to make the purchase, your crypto will become available instantly.

Selling works similarly. The main things you want to look out for here are which wallet you are selling from (fancy word for Bitcoin, Ethereum and Litecoin accounts), and where you want to deposit the money from the sale.

You can choose your bank account or leave the money on the exchange (recommended if you plan on making future trades as you really don’t want to wait 4-5 days for your bank to clear).

Finally, you can select to repeat transactions.

On the mobile side, things are pretty much the same:

A nice feature that the mobile app has, is price alerting

A nice feature that the mobile app has, is price alerting. This is great for responding to price fluctuations, which can present nice buying or selling opportunities.

 

Security

Enable Two factor authentication (2FA) and confirm your phone number. I’ve locked myself before (doing something silly that you won’t encounter anytime soon), and the only thing that allowed me to recover my account was the fact that my phone number was verified and I could get the security code that way. Verify that number!

You have to enable 2FA via the web app:

Enable 2FA via the web app

 

A QR code will appear which you will scan with Google Authenticator. Take a screenshot of that QR code and/or the secret code that they provide, because that’s how you will restore access in the event that you lose your phone. Input the number displayed in your Google Authenticator to confirm that you want to enable 2FA, and you’re done.

I recommend requiring verification for any amount of digital currency transactions.

Fees

Due to the fact that it’s more of a broker than an exchange, and given the ease of use that is meant to bring in newbies, Coinbase does have higher fees than its competitors. As is the standard, bank transfers are free, but there is a cost associated with wire transfers. A full schedule of fees can be found here.

Insurance

This exchange is insured, meaning that if they suffer a loss resulting from a breach of their physical security, cyber security or by employee theft, the policy will pay out to cover your digital currency. They claim to hold less than 2% of customer cryto currency in online storage, with most being held offline. This reduces the chances that they will get hacked.

Furthermore, if you have USD deposited and are a United States resident, your wallet (account) is covered by FDIC insurance, up to a maximum of $250,000. It is important to note that if your account gets hacked for reasons other than the ones just mentioned, you are responsible. You can read more about their insurance policy here.

GDAX

GDAX is Coinbase’s trading platform. In other words, it’s a fully featured crypto currency exchange. Whereas Coinbase is simple looking, easy to pick up and limited in its functionality, GDAX is more more sophisticated and can appear daunting. Red and green numbers and charts move frantically, making it appear intimidating to new traders.

Features and key points

In fact, GDAX is not that complex to learn, and the added benefits really are worth the time, especially the low (or even 0) fees.

Here are some of the main points with GDAX:

  • Full trading features (limits, stop loss etc.)
  • High volume and liquidity (will explain)
  • Same protections offered by Coinbase
  • Instant money/crypto transactions with Coinbase
  • Much lower general fees
  • 0 maker fees (will explain)
  • No mobile app
  • Can appear daunting for newbies

Interface and trading

This will be the meat of the post, as I find GDAX to have the simplest implementation of advanced features. Once you get a hang of some of the tools using this platform, you should be able to figure it out on any other crypto exchange, assuming they’re offered.

Even though I’m registered and verified on at last a half dozen exchanges that offer FIAT (traditional currency) to crypto currency conversions, I almost exclusively use GDAX for this purpose.

It’s not that others aren’t necessarily as good, but rather that most of them haven’t been around as long, such as Gemini or don’t have a 0 fee tier for lower volume traders (like me) such as Kraken or Bitstamp. In some cases, I just don’t like the interface.

If you just don’t care about fees too much and prefer another exchange for whatever reason, the same principles that you will learn about here will likely apply there as well.

With GDAX, I’m very familiar with their platform, I like their ease of use, fee structure, and they have been around longer than most. This is good enough for me.

Ready, set, go

Here is what GDAX looks like in its full glory:

GDAX in its full glory

There is a ton going on, and as mentioned, it can appear intimidating at first glance.
It really comes down to a few key building blocks that make up a full fledged exchange.

The price chart

 

By default a line graph that indicates prices over a period of time ranging from 30 days to 30 minutes. The vertical bars at the bottom visualize volume (the number of transactions) for buy (green) and sell (red) orders. Often you will see a correlation between a price increase/drop and high volume as people rush to buy or sell.

The far better but more complex view is the candle or candlestick view. The ranges available here are per candle (or bar) from 1 minute to 1 day with each candle representing 1 minute to 1 day of trading, respectively. Reading candlesticks and doing trend analysis (often called TA) goes beyond the scope of this article, but the gist of it is that green candles represent an increase in price over the selected time range, whereas red candles indicate the opposite.

Let’s say that you have a 1h view selected: The bottom of a green candle’s body is where the price opened (started) at the beginning of the hour, and the top of the body is where the price closed (ended up) at the end of the hour. The lines coming out of the bottom and top show the price variance during that one hour timeframe. Red candles are similar but the beginning price is the top of the candle and the ending price is the bottom.

Just like with the line graph, the grey vertical bars indicate volume, but aren’t colored because the candles are (pretty neat huh?).

The order book

 

You know that scene from any Wall Street movie where guys are screaming over each to place bids on stocks? They’re basically trying to get their orders added to the order book, a record of all buy and sell requests, the oldschool way. Luckily, we don’t have to stand next to a sweaty dude and try to yell our order to the top. Instead, we can place a buy or sell crypto currency order from anywhere, anytime 24/7/365 . These are also called bids and asks, respectively.

That’s the foundation of an exchange. It does get a bit trickier with different order types, but basically you can think of it this way: You can either place a buy order or sell order that gets added to an overall ledger (order book). If a buy is matched against a sell order, the order is processed, and depending on the order type (we’ll get there), the exchange takes a fee.

The depth chart

This is a visual representation of all the buy and sell orders that make up the order book. The depth chart shows all the bid and ask orders over a range of prices. Your orders will show up here as well, and will be indicated by a diamond shape along the price range. You might have to zoom out to be able to see that. The chart also shows the size of the order. Large orders will often result in a vertical jump, like a stair in a staircase. These are often referenced to as either sell or buy walls depending on what side of the order book the show up on.

The simplest way to think about this in the context of an order book is that a sell wall will prevent the price from going up until the currency listed at that price is sold (or the orders are removed), whereas a buy wall will prevent the price from going down until enough currency is bought to satisfy that buy order at that price (or the order is removed).

Imagine trying to buy a car from a dealer for $10,000, when there are five other people who are willing to buy that same car for $11,000. They are essentially putting up a buy wall, as the dealer will never sell the car for $10,000 until all of the $11,000 orders are completed. Maybe then if nobody else puts in a higher order, you will finally be able to buy at $10,000.

Similarly, if I’m a dealer and I want to sell my car for $12,000 while dealers around me are offering the same car for $11,500 (effectively putting up a sell wall), I probably won’t be able to sell it until all of the cheaper offers are off the table. This is essentially how an order book works, and most exchanges use this system.

 

These visual cues, although slightly more advanced, can give you additional insight while trading. In particular if you want to buy or sell at a specific price, it’s easier to find a match for that price before a wall.

The order book

This is the giant wall of text and numbers that you see on the left side. Pretty self explanatory. It’s another representation of the buy/bid and sell/ask orders with larger horizontal bars indicating higher cumulative size (big orders). Your orders will show up here as well and will have the “My Size” column populated.

Trade history


This is the giant wall of text and numbers that you see on the right side. As the name indicates, this is a historical record of transactions. Sometimes this will rapidly populate when there is a high volume of transactions. Just as with the order book, larger orders will show up with longer horizontal bars to indicate the size of the transaction.

Types of orders

You can select the order type in the top left panel. The three options are market, limit and stop orders.

Market orders are the most common and simplest order that you can place. A market order will execute immediately at the current market price.This is basically saying that if the market price of Ethereum is $350 when you click the buy button, you will pay that rate and not more, but perhaps less if the entire order isn’t fully filled (a fancy word for completed). If your order fills at multiple prices at or below $350, all the details will be shown in the FILLS column to the bottom right. Finally, market orders cannot be cancelled because they are filled immediately.

Limit orders let you set your own price and let you control how long you want the order to remain up. They also let you trade for free with 0 fees if you are adding orders to the order book. What this means is that if you want to buy Ethereum at $330, but it’s currently trading at $350, you can place a limit buy order that will add your bid to the order book, thus adding or making liquidity. Think of it as making it easier for others to trade by creating trade opportunities.

The same applies on the other side of the trade. Let’s say that you want to sell Ethereum at $370, but it’s still only trading at $350 (Ethereum really likes the $350 price). You would place a limit sell order to do so, which will add your ask to the order book, also creating liquidity and allowing you to trade for 0 fees.

This concept of adding liquidity is called being a market maker, and makers trade for free on GDAX. This is one of the main reasons that I prefer the platform over others, as it’s the only one that I’m aware of that has this enticing fee structure.

GDAX also provides some clarification around limit orders: When you place an order, it will be shown in several views – including ‘Open orders’, the ‘Order book’, and the ‘Depth chart’. A basic limit order may be partially filled and is subject to price improvement – you may get an even better price than you asked for.     

Advanced Limit order options

I never really use these other than the default Good ‘Til Canceled (GTC) order type. Basically you can leave a limit rder forever (until you cancel) or do one of the following:

  • Immediate or Cancel (IOC) – This order will be placed and if it is not immediately filled, it will automatically be cancelled and removed from the order book.
  • Fill or Kill (FOC) – This order will only complete if the entire amount can be matched. Partial matches are not filled with this order type and will not execute (remember how I said that not all orders will fill at the exact price? This would void the order)
  • Post Only – You can also check the ‘Post only’ option. This will ensure the order executes only as a maker (no fee) order. If part of the order results in taking liquidity rather than providing, it will be rejected and no part of the order will execute (I keep this checked since it’s the default option and I don’t like fees).

GDAX also offers some video explanations of their exchange features dictated by a robot. You can find that here.

Stop orders

The most powerful type of order as it combines limit and market orders. The result is either a stop market or stop limit order. Cool names, but what does this actually mean?

Stop limit and stop market orders offer the most granular control over your transactions They are often used to protect profit or to get in on the action if the price starts trending up.

Let’s say that you own Litecoin and your average price paid was $30. It’s now trading at $60 and you want to sell at $45 if the price drops to protect some of your profit. After all, if it starts to rapidly decrease in price, nobody knows how low it can drop, so you’re correct in playing it safe.

There are two ways you can go about this:

  • A stop market order that will become a live sell order once the price drops to $45. This ensures that you will sell and exit your position, but it doesn’t cap how low you are willing to sell for. Imagine that the price drops rapidly and for a few minutes it goes all the way down to $20. It’s possible that you might sell a portion of your Litecoin for $20. This is called slippage and occurs during periods of high volatility (which is pretty often in crypto).
  • A stop limit order that will become a live sell order once the price drops to $45 but will have a cap at how low you are willing to sell for, called the limit. If you set the limit to $40, the order will only be live between the price of $45 and $40 and will ensure that you will sell between this range, however it does not ensure that you order actually goes through. If the price drops rapidly enough, you might not be able to sell all of what you wanted in your desired price range. This would result in a partial fill, but at least you would guarantee some profit.

In June I had some Ethereum that I was lucky enough to buy at a pretty low price. As the price kept going up, I was worried that eventually it would eventually drop steeply. I wanted to make sure that I would be able to protect some of my profit, and I decided that I would sell between $200 (stop) but no lower than $190 (limit). That same month, Ethereum dropped to as low as a few cents on GDAX during a day of wild volatility paired with a crash of the exchange. My stop limit order protected my profits effectively, and I was able to buy back in later.

On the flipside of the equation, you can put in a stop market or stop limit buy order. For example, if you believe that the price of Ethereum will continue to rise if it reaches $400 but you don’t want to pay more than $410 per coin, you can set a buy with a stop at $400 and limit at $410. This will ensure that you buy only if the price reaches $400 and stays below $410.

Security

Uses the same settings as Coinbase. If you have Coinbase properly configured, there is nothing else you have to do with GDAX.

Fees

Different (better) than Coinbase. Fees are based on volume and whether you are a market maker or taker. A full schedule of fees can be found here for each currency pair.

Insurance

Very similar to Coinbase. You can read more about their insurance policy here.

Conclusion

We’ve reached the end of this breakdown. Hopefully you won’t have to google too much and most of the content actually made some sense.

If you’re going to try your hand at investing, I would recommend going in with small amounts at first to familiarize yourself with the basic functions of the exchange.

You also want to get used to the market volatility, so that you don’t panic sell during a inevitable rapid dip.  One of the biggest surprises to me was how big the price swings could be in a relatively short period of time.

Again, don’t invest more than you’re comfortable with (potentially losing).

Buy low, sell high and enjoy the ride.

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