Buying and Selling Cryptos
The cryptoasset markets are still in a relatively early stage. It is difficult to buy and sell cryptocurrencies and related assets. Also, above and beyond the technological barriers, there are a lot of scams out there. This page will give you some general guidelines about investing your money safely.
Warnings and Scams
Before educating you about legitimate ways of buying assets on cryptoasset exchanges, we should warn you about ways NOT to buy crypto: Don't buy crypto from eBay, don't buy crypto from CraigsList, don't buy crypto from people advertising in newspapers or on posters. In rare cases, you may find legitimate sellers on these sites, but the majority of the deals you will find are either highly overpriced or outright scams. We've seen ads for people who were selling "1 MIOTA" on eBay for over $100 USD, when the market trading price on Binance was only forty cents for a MIOTA. In-person meetings, even in public venues such as libraries and food courts, can lead to a physical safety risk, because malicious persons can figure out your real-world identity for later targeting. Cryptocurrency fan meet-ups and websites such as "Local Bitcoins" have historically provided some legitimate functionality in helping create a market for cryptocurrencies, but it is highly recommended at the present time that anyone who wants to invest should restrict their purchases to legitimate online cryptoasset exchanges. To be honest, even some of the major crypto exchanges have questionable pedigrees.
Online Exchanges
As with many other types of businesses, there are reputable cryptoasset exchanges, and there are exchanges which often face technological issues (or which have terrible customer support for when things go wrong). In addition to researching the cryptoassets that you want to buy, it is important to research the exchanges that you will use to buy them. Exchanges can be located almost anywhere in the world, and there are some decentralized exchanges that aren't really based in any one specific country. Unlikely traditional stock exchanges, which have regular set trading hours, all crypto exchanges remain open 24 hours per day. Crypto never sleeps.
Broadly speaking, it is useful to start by breaking down online exchanges into two groups: fiat gateway exchanges and pure crypto trading exchanges. A gateway exchange allows you to deposit traditional fiat money into the exchange. Some of the gateway exchanges allow only the deposit of US dollars or Euros. Other gateway exchanges allow a wide variety of fiat currencies to fund future purchases of cryptos. You'll have to do some research into which exchanges are most suitable for use as a gateway fiat exchange for the country that you live in. Coinbase is one of the most well-known gateway exchanges. It is based in the United States, but accepts currencies from quite a few countries around the world. Depending on your location, you may be allowed to deposit funds by wire transfer, credit card, bank card, or other means. The length of time that it takes for these various funding methods to be processed will vary significantly, as do the fees associated with each type of funding method.
Throughout most of 2017, Coinbase only offered trading in three types of cryptoassets: Bitcoin, Ethereum, and Litecoin. If you wanted to invest in a different type of cryptocurrency, you needed to get an account on a second exchange. A few years later, Coinbase now offers trading in several additional cryptos, but the selection is still quite limited.
Let's pretend that you want to buy a certain type of cryptocurrency, a fictitious crypto called ExampleCoin which is only traded on a single exchange, Bittrex. Bittrex is another exchange based in the United States, however, when it started out, it was not a fiat gateway exchange. Bittrex now allows fiat transactions, but for the sake of this example, let's pretend that it is still 2017 and Bittrex doesn't touch fiat. At the time, it was not possible to add traditional fiat funds to Bittrex, or to withdraw fiat funds to your bank account. The only thing that Bittrex allowed you to do was to trade between different types of cryptoassets.
Until recently, Bittrex was a pure crypto trading exchange and despite this limitation, Bittrex was quite useful. It offered trading for hundreds of cryptoassets. There are still many examples of pure crypto exchanges around the world that don't touch fiat, usually because regulatory oversight becomes much more stringent when fiat money is involved.
Right now, Bitcoin is the de facto standard within the cryptocurrency world, so most of the cryptos traded on Bittrex (and all similar exchanges) are traded in terms of Bitcoin value rather than dollar value. If a crypto can be traded on an exchange for another crypto, it is referred to as a trading pair. As such, if you can buy and sell ExampleCoin in terms of Bitcoin, then the exchange is said to have a ExampleCoin/Bitcoin trading pair. The majority of cryptocurrencies in the world are set up in trading pairs with Bitcoin. Less frequently, other trading pairs are available on some exchanges, although this type of diversity is growing. Some exchanges allow less well-known cryptos to be traded in terms of Ethereum (ETH) or Litecoin (LTC) or Tether (USDT). As the markets continue to mature, the public will see more and more trading pairs added to various exchanges, which will be a good thing. Flexibility is useful.
Let's assume that you want to buy ExampleCoin. At this point, let's assume that you've deposited fiat funds to your gateway exchange such as Coinbase. The next step is to buy some Bitcoin, and transfer that Bitcoin from your gateway exchange to the pure crypto trading exchange. In this case, you would buy some Bitcoin on Coinbase, and then send your Bitcoin from your Coinbase BTC wallet to your Bittrex BTC wallet. The terms may vary from exchange to exchange. For example, your exchange may say that you are "withdrawing" Bitcoin rather than "sending" Bitcoin. It's important to remember that in order to initiate a transaction, you always do it from the "sending" exchange. In other words, in this example, to transfer Bitcoin from Coinbase to Bittrex, you make the transaction happen by sending it from Coinbase, not by requesting it on Bittrex.
It is extremely important to note that every wallet on every exchange is designed ONLY to hold one specific type of crypto. If you have an account on Coinbase, and you own both Bitcoin and Litecoin, they are NOT stored in the same wallet. You'll have a Bitcoin wallet with one address, and a Litecoin wallet with a different address. This is extremely important to note as it IS possible to send some types of cryptocurrencies to wallets for different cryptos. If you make this mistake, you will lose your crypto, as there is no way to reverse the transaction and no way to recover it! It is therefore important to be very careful when sending a specific type of cryptocurrency to a different wallet or address (the terms are synonymous). You need to be absolutely certain that you're sending it to the proper type of wallet. Never send Litecoin to a Bitcoin wallet, or Bitcoin to an Ethereum wallet, or anything like that. If you do, you'll end up with nothing.
You can easily have multiple wallets for a specific type of crypto. There is no cost to setting up wallets (except for a few rare cryptos that require a minimum balance in your wallet). It is no problem for you to have three Bitcoin wallets on three different exchanges, plus four paper Bitcoin wallets, plus a hardware wallet. As long as you can keep track of your private keys for each wallet, you can have as many as you want. Also, once you have an account on a cryptocurrency exchange, you probably have access to wallets for every type of crypto that the exchange can trade. So for example, you will have a Bitcoin wallet on Bittrex, and a separate Ethereum wallet on Bittrex, and a separate Litecoin wallet on Bittrex, and so on. Finally, on many exchanges, you can have multiple wallets set up for a single type of crypto. So for example, some exchanges may allow you to have seven separate Bitcoin wallets, if that's what you want. We'll go into a lot more detail about wallets soon.
Once you've successfully moved your Bitcoin to the second exchange, you can use that Bitcoin to buy your ExampleCoin. The first couple of times that you move Bitcoin from your fiat gateway exchange to a different exchange, you'll be very nervous. You'll wonder why the transaction isn't happening immediately. Bitcoin is especially slow to transfer, so it may even be a few hours before your transaction is processed. This is a weakness that affects some cryptocurrencies more than others.
You know that Bitcoin has an average block mining time of about ten minutes, so you're probably wondering why a transaction could take longer than ten minutes. One possibility is that your transaction may not get included in the next block to get mined, especially if there are a large number of global transactions occurring simultaneously. Another possibility is that the miners, by random chance, might take much longer than ten minutes to find the next block. We've occasionally seen blocks that took more than sixty minutes to be mined (and we've also seen blocks that only took a few seconds).
Moreover, with respect to exchanges, once your transaction does get into a block, that block still requires multiple "confirmations." This means that the exchange doesn't necessarily believe that your Bitcoin transaction is legitimate until it is buried a few layers deep into the blockchain. Each time a new block is mined, it acts as another confirmation or layer being piled on top of all older blocks, including the block with your specific transaction. Every new block that gets added to a blockchain enhances the legitimacy and security of all older blocks. This is because as more blocks get added, the possibility of a temporary "accidental fork" diminishes, which makes the exchange more confident that your transaction was legitimate. The number of transaction confirmations required for various cryptos will vary from exchange to exchange, and furthermore, will depend upon the particular crypto. Most exchanges require five or six confirmations before they'll view your transaction as legitimate. Let's say that you move some Bitcoin and it gets included in the very next block to be mined. Despite that, you may have to wait for five or six more blocks to be mined (at an average of about ten minutes apiece) before your assets are "approved" (show up in your trading account) on your second exchange. On a positive note, once your transaction has appeared in a block, you'll usually get a notice on your destination exchange to reassure you that the transaction is in progress. In the case of Bittrex, it may list your incoming Bitcoins in a "pending deposits" column.
Different exchanges allow different types of orders, including "market" orders and "limit" orders. A "market buy" order allows you to buy Bitcoin immediately at the lowest price that any of the sellers on the exchange is willing to accept for their Bitcoin. A "market sell" order allows you to sell immediately at the highest price that any of the buyers on the exchange are willing to pay to obtain Bitcoin. Market orders, regardless of whether they are buys or sells, will always get filled immediately (as long as there are any opposing sell or buy orders on the exchange). The drawback is that the price at which your market order gets filled may not be quite what you hoped. Market orders are good if you're in a hurry, because they are filled almost instantly, although there may be a slight discount to the "best price" that you might have been able to get otherwise, had you been more patient.
Limit orders are good for patient traders. A limit order is more restrictive. Limit buy orders require a trader to specify a "limit," or maximum amount they are willing to pay to make a purchase. Limit sell orders require a trader to specify a limit for the lowest price at which they are willing to sell their coins or securities. Your limit orders will never be executed if no opposing buyer/seller is willing to meet your terms. For example, let's pretend that we've just placed a limit order to buy a security at $100 per coin. Our order is referred to as a "bid" order. It's like an auction, because we're willing to pay up to $100 per coin (we also specify exactly how many coins we're willing to buy at that price). At the moment, let's assume that most of the sellers using the exchange have placed orders that show they aren't willing to sell their coins for less than $104 (they are using limit sell orders, also referred to as "asks"). However, there is one seller who is willing to sell his coins for $102 (let's call this person Brad). In this example, nobody has placed any "market" orders, and all of the buyers and sellers on the order book have placed "limit" orders. Therefore, there is a gap between the highest outstanding bid (our bid at $100) and the lowest ask (Brad's ask at $102), so for the time being, no orders can be matched and no trades will be executed. Remember that our order won't be filled until someone finally comes along who is willing to sell their coins for $100 each (our bid price).
If someone else (Charlie) came in and placed an order that showed that he was willing to buy coins at $101, then Charlie's order wouldn't get filled either. That's because the lowest "ask" or selling price is still $102, and Charlie is only willing to pay $101. However, if someone else comes along who is willing to sell for $101 or lower, then Charlie's order will get filled.
If someone had come in and said that that they were willing to sell for $100, then Charlie's order would still be filled before ours, even though we placed our order first. This is because the exchange makes sure that people always get the best price possible. A hierarchy exists for the buy and sell orders based upon first-come, first-serve at every unique price level, but when the price levels vary, then a higher bid or lower ask gets priority. Charlie's bid of $101 is "better" for a seller than our bid of $100, so his order is prioritized. If we had both bid the same amount, then our order (the earliest) would have been prioritized.
This has been a very quick overview of the difference between market and limit orders, and you should do additional research before starting to do any active trading. In fact, we urge you to finish reading through this entire website (or our book) and make sure you understand it completely before you make any purchase decisions that might put your hard-earned money at risk. We also highly recommend that you buy a book that teaches the basics of trading on conventional stock exchanges, because the processes are almost exactly the same.
Once you've bought the coins that you wanted (ExampleCoin), you have to make a decision as to what to do with them. Should you leave them on the exchange, or move them to a personal wallet? Leaving your coins on an exchange is simple, and exchanges are generally secure, but there is still a significant risk. Crypto exchanges are very big targets for hackers, due to the enormous sums of money involved. There have been several recent notable examples of exchanges being hacked, resulting in users losing the coins that the exchanges were holding for them. You can read more about this in the Notable Hacks section of our website. Remember, when your crypto is on an exchange, the exchange holds and controls the private keys to the wallets containing your crypto. Unless you have your crypto in a private wallet of your own, not on an exchange, you aren't in control of your own assets. This is a security risk. There's a famous phrase to describe this: "Not your keys, not your coins."
Every wallet, whether it's on an exchange, on a physical device that you own, in an online wallet, or in a paper wallet, will require a password to open it. This password is called a "private key." When you leave your coins on an exchange, you are trusting the exchange to take care of your private keys for you. This involves a risk. Although the risk may not be huge, especially for the more reputable exchanges, it is still a non-zero risk. If you don't control your private keys, or if anyone has access to your private keys, then you're at risk. Risk-averse investors should almost always move their coins into a personal wallet of some type. This is especially true if you're holding what, to you, is a significant amount of crypto. The only exception to this rule might be if you meet all three of the following conditions: (1) You're using a very reputable exchange, such as Coinbase; (2) You are dealing with small dollar amounts, so your financial stability wouldn't be at risk if you somehow lost your investment; and (3) Your technology comfort level with using wallets is low, and you're nervous that you'll screw something up if you try to create and use an off-exchange wallet. Otherwise, if you feel comfortable with the technology, we always recommend moving your assets off the exchange.
Unfortunately, risks exist in moving your coins to a personal wallet. You can find more information in the Wallets section of this site, but some of the risks involve user error, sending crypto to the wrong type of wallet, losing your private key, getting hacked, and more. If you are moving coins from an exchange to a wallet of your own, we suggest that you "practice" first. Set up your wallet, and when you make your first transfer, only send a very small amount of your cryptocurrency to the wallet, to make sure that the wallet works. If your transaction wasn't successful, you'll be glad that you didn't send everything you own, and you'll have the opportunity to do some trouble-shooting.
There's a chance that certain cryptocurrency exchanges that you want to use are based in countries other than the one you live in. While you should always use caution when researching exchanges, don't assume that an exchange from another country is useless to you. The authors of this book are Canadians, based in Canada, but have used an American exchange (for funding) and have traded cryptocurrencies on exchanges based in more than half a dozen other countries.
Cryptocurrencies know no international boundaries. You can send cryptocurrencies to any part of the globe where there is an internet connection. Unfortunately, some exchanges impose user restrictions based upon nationality. For example, the Bitfinex exchange does not allow customers from the United States, due to the strict regulations that American authorities have put into place. Within the United States, residents of certain states are prohibited from trading on certain US-based exchanges. Depending on where you live, cryptocurrencies can be classified by your government under different asset classes (currency, commodity, property, etc.) and the taxation status for buying and selling may also vary. You should always do research, before buying and selling, so you understand the tax laws that may apply in your country. This may affect the way that you plan your trading activities and record-keeping. You should always keep an exact record of every buy or sell transaction involving any type of cryptocurrency, in case the tax authorities in your country request documentation of your trading activities. We'll talk more about this in the website section about taxes.
In terms of assessing which exchanges are the safest to use, there are several things that you can consider. What is the reputation of the exchange on social media sites such as Reddit? Do customers seem to run into a lot of problems, and does the support team for the exchange respond satisfactorily and in a timely manner? What country is the exchange based in, and does it have any specific restrictions for users of your country? If the exchange is based in a different country, you will probably have fewer options for recourse if something goes wrong. What is the overall average daily volume of the exchange? The top five exchanges globally are probably safer to use than smaller exchanges, based simply on the logic that these exchanges have grown because customers are satisfied with their trading experiences (let's ignore the potential phenomenon of wash trading for the moment). Does the exchange that you're researching allow trading of the specific cryptoassets that you're interested in? There's no point setting up an account on Binance if, for example, you want to buy ExampleCoin and Binance doesn't offer trading in ExampleCoin.
No matter which exchange you use, there's a chance that they may want some sort of identity verification. This may surprise you, and you may be reluctant to provide such identification. If you are suspicious about submitting your personal identity information to strangers who are running sketchy cryptocurrency exchanges in foreign countries, that's a good thing! You should be suspicious. Be suspicious of everything related to crypto. However, it is very common for exchanges to require identity verification before they allow you to start trading. Be prepared to submit documents such as the following: A scan/photo of both sides of your driver's license or passport; something that confirms your address (such as a bank statement or pay stub or utility bill); and a photo of yourself, holding the ID that you are submitting, with a handwritten sign that has the name of the exchange and the date that you are submitting the documentation. We're not kidding. Certain countries (especially the United States) have regulations relating to KYC (Know Your Customer) and AML (Anti-Money Laundering). Exchanges generally prefer to meet those rules even when they aren't located in the United States. If you are working with a gateway exchange that allows you to deposit or withdraw fiat currency, you may need to provide some information to confirm that you control the bank account from/to which funds are being transferred.
As already mentioned, for further research about trading cryptocurrencies, we recommend that you study some basic guides to trading stocks on traditional exchanges. That process is extremely similar to trading on crypto exchanges, so the only hard part is understanding and working with the technical steps required for maximizing your security precautions and storing your assets safely. We have several sections on this website that go into those topics in more detail.