Before You Begin
Lesson 6: Digital Currency Exchange Primer
Transcript of video lesson
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Welcome back to Digital Currency Ownership: Before You Begin, an original Coin Academy course designed to introduce you to the basics of digital currency ownership. There are six lessons in this course, we are on the final lesson right now which is the Digital Currency Exchange Primer. In this lesson we’re going to take you through the basic characteristics of a digital currency exchange, we’re going to look at this sort of information that you are going to find on an exchange and we’re going to give you some general guidelines for selecting the right exchange for you.
Let’s get started by identifying first who are the major players in the digital currency exchange market. There are quite a few and we’ll give you a link in a sec in where you can find out who they are. Many of them are located in specific countries and deals with specific currencies, others are more international in nature.
But the top five are here and you’ll notice of the top five that the top two are actually denominated in Chinese Yuan. In fact the number one exchange in terms of volume in last 30 days, OK Coin, actually did more volume than the other four top exchanges combined. This actually isn’t terribly unusual at least at this point in time. Chinese transactions seem to account for about 60% of total global Bitcoin volume. This despite the fact that Bitcoin isn’t actually recognized in China.
The bottom three exchanges are all denominated in US dollars and do fair amounts of traffic, BitStamp being one of the more popular ones, at least in terms of having usable interface, but there’s nothing wrong with btc-e or Bitfinex either. Really, this is a highly personal decision, and we’ll get to the criteria for that in just a moment. If you like to do a bit more research and take a look at the other exchanges that are out there, here’s a URL that gives you a list of exchanges, that is a fairly up to date list, that is seemed pretty well maintained but again this does change from time to time so Google’s your friend.
Let’s take a look at the main features of a digital currency exchange, in other words what can you expect from an exchange. Well the basics they will receive cash deposits from you so you put cash into an account there to use for purchases. They also will allow you to purchase digital currency in exchange for national or fiat currency.
They will facilitate exchanges between digital currencies, at least most of them will. They’ll also allow you or provide for you a marketplace where you can sell digital currency in exchange for national currency. They will allow you to withdraw digital currency to your digital wallet so you can store the outside the web, which you should always do, and they will provide settlement well which will allow you to settle for national currency and they will move them to bank accounts some of them with the direct deposit system which is cheap and fairly automatic others only provide wire transfer which tends to be quite expensive, so this is one of the items you definitely want to research.
Additionally, some exchanges offer more specialized services similar to what you’d find with traditional stock broker. They would allow purchase of digital currency with PayPal or credit card. They would also provide escrow services and they will offer long and short positions and put and call options allowing you to speculate on whether the market is going to rise and fall and into what extent. They should also provide for you a number of pieces of charting data that give you some idea of how the market is moving and allow you to make decisions. Now this varies widely, some of them provide very rich real time data, others only provide real minimal data.
One thing you can always count on finding however is the Order Book, and this is a screenshot of an extremely simple Order Book which serves as well for introducing the concept. An Order Book is where all of the buy and sell orders are visible so that you can find out what is the action is on the exchange and figure out where you are want to participate.
It’s divided in two parts, the bid side on the left, in this case and the ask side on the right, and before I go any further, this is a shot from an exchange in Indonesia so the prices here are denominated in Indonesian Rupiah that’s why all those digits. Let’s break this down, what does the bid side tell us.
Well this is the buy side in other words the price that buyers are willing to pay. The ask side is the sell side, that is the price that sellers are asking for their coin. So bid is buy, ask is sell. B for buy, ask has an S in it, that’s for sell. Now let’s look at the all three columns in each of these, first on the left hand side here we have the unit price, in other words this is the price per Bitcoin.
Now let us take a look at the first row. In the first row, we have someone who is willing to buy Bitcoin at a price of 5,921,000 Rupiah per Bitcoin, now the middle column tells us how many Bitcoin they’re looking to buy. In this case, the buyer is actually interested in .03149769 Bitcoin, a very, very small buy order here and notice that leaves the total value of the transaction is actually 187,059 Rupiah, quite a small purchase.
If you go all the way down to the bottom row on the bid side you’ll see here someone who is willing to pay 5.9 million per Bitcoin they’re actually wanna buy slightly over 2 Bitcoins so that transaction value much, much higher 11,923,383 Rupiah. Those three columns serves exactly the same purchase on the Asks side. Here is a seller who is willing to sell Rupiah for 5,968,000 Rupiah but they’re only selling .03 and some change Bitcoin meaning if you wanted to purchase that your total purchase price is 196,048 Rupiah and that’s simply repeated in each of the columns below that, usually the ranking is on the price. So this is your basic order book that details the individual orders and of course this changes all the time as these orders are filled and if you’re participating in the market, you are trying to sell, well then your items will appear here as well.
Additionally the order book, typically contains a summary chart, this a very simplistic summary chart from the same exchange. On the left hand side we see the total Bid orders, on the right hand side the total Asks. You’ll notice that the Bids outnumbered the Asks. This indicates to us that we do have a trending market on the buy side, so prices are probably going up. All this is, is an aggregation of all the individual order book data. This is useful for trend analysis, just gives us an idea of what’s happening. Additionally most exchanges will include pricing charts. Now this vary widely in terms of the detail and the features that are available.
Let me step you through this one and then we’ll talk about it a little more. This type of chart is typically called a candle chart or in some cases a candle stick chart. And this has to do with the fact that we’ve got those candle like markers running through the middle of the chart. It’s really useful for trend analysis not only does it tells us the current price, it tells us historical prices, volumes and whether on that day there were more buy or sell orders.
If you take a look at the primary vertical axis, that’s on the right side column, you’ll see the price in US dollars. If you take a look at the secondary vertical axis that is on the left side, this is the unit volume of orders for that time period. And right across the bottom, the horizontal axis we’ve got time, this is in days. The first day is July 1st, the last time would be August 28. And so for each of those days, you’re able to see the volume for the day and whether there are more buy or sell orders, whether it’s red or green and above that you’re also able to see the price and that little candle indicates the day’s trading range. So on a particular day you see what was the low price, what was the high price for that day, the trading range.
These are a key chart for you planning your purchases and detecting market activity. If you’ll notice across the top here there are a variety of different options with this chart you can change the time period, you can change the chart type, you can change the moving average, add all sorts of technical indicators. This is quite good when you can get into it as much as you want. This one comes from bitcoincharts.com, you can see the URL there on the image as well. It’s one of the better charting data sites.
How do you select an exchange? Well there’s a number of criteria but it is largely a personal decision. Initially though you’re probably requirements and features driven. So key questions to ask:
1. Does it integrate with your bank account?
2. Will it settle in the currencies that you desire?
3. Does it provide access to all the digital currencies that you want to own or explore?
4. And finally are the fees competitive?
And right now those typically run .1 to .35%.
Next make sure they provide two factor authentication, this is a security issue, you don’t want to be dealing with an online exchange without two factor authentication period. That’s as far as we’re concern that is a deal breaker. No two factor authentication, no deal.
Next do they provide good market data? And is their charting real time? And finally is it a user friendly interface? Some people are more comfortable with more advanced financial analysis tools, great, there are sites for them. Other people want very basic, easy to read charts, there are sites for them as well. I do encourage you though to find the site that offers the most accurate real time data. That’s the key to making good trades particularly if you’re engaged in any kind of arbitrage.
The next question to ask and this is again a security question, what is the extent of their reserve? Ideally it should be a 100% and they should also audit their reserves as well. Basically you are just trying to make sure that this exchange will remain liquid and that if you want to get your Bitcoin exchanged to fiat currency, you can do so instead of being left holding it.
Next do they have a good reputation? Very simple: go Google them. Figure out if they’ve been hacked, figure out what the other people are saying, and last how do they handle customer service? Is there 24 hour costumer service? Is it online chat only? Is there phone number? Can you reach people? Do they speak your language? Might be worthwhile just to try out the customer service before you get involved because that’s one of those things that you don’t want to find out that is no good when you actually really need it.
Now, we’re not going to take you through the process of actually setting up an exchange account and the reason is, is that it varies widely from exchange to exchange. So there’s really no value for us to show you that process, it’s unlikely to be similar to what you see yourself.
This is the last lesson in this course. Hopefully now you have some idea of what you need to do before you get involved in digital currency ownership.
Thank you very much for listening and we hope we see you in other courses in the future.