Bitcoin may be purchased from a person, a Bitcoin ATM, or via an exchange platform. We will look at exchanges as they are the most common way for people to buy bitcoin, and in most cases, safer for someone new to bitcoin.
Types of Exchanges
There are three main types of exchanges. Each type caters to a particular purpose, and can be categorised as follows:
- Fiat-to-Crypto Exchanges
- P2P Exchanges
- Crypto-to-Crypto Exchanges
A. Fiat-to-Crypto Exchanges
These are exchanges where local fiat currencies (USD, GBP, EUR, JPY etc) can be used to buy bitcoin.
Cash currencies can be deposited via online bank transfer, international wire transfer or ATM cash deposit. For some exchanges, credit card, debit card and PayPal can be used to purchase bitcoin.
Once your cash currency has been successfully deposited into your account, you will then be able to convert your cash for bitcoin.
B. P2P Exchanges
Peer-to-peer (P2P) exchanges are platforms where bitcoin can be bought or sold amongst registered users.
The exchange doesn’t handle the buyer’s cash, but keeps the seller’s BTC locked for the purpose of selling.
Once the buyer has deposited the correct amount of cash into the seller’s bank account, the seller would indicate a confirmation of this on his account, and the exchange would then release the agreed amount of BTC to the buyer. The transaction is then completed.
A P2P exchange serves as an escrow platform for the safety of both the buyer and the seller. Neither party can cheat nor abscond with the funds or BTC, unless both parties agree to terminate the transaction.
Due to the buying of bitcoin using fiat currencies, a P2P exchange is also considered a fiat-to-crypto exchange.
However, the amount of bitcoin available for sale in a single transaction is limited as it is dependent on how many BTC a particular seller has for sale. For higher quantities of BTC, a fiat-to-crypto exchange is preferable.
C. Crypto-to-Crypto Exchanges
These are exchanges where you can deposit one cryptocurrency in exchange for one of the many other cryptocurrencies known as altcoins. For example, you could deposit bitcoin (BTC) in exchange for ether (ETH), or vice versa.
Fiat currencies are not in any part of the transaction and hence this type of exchanges can serve an international userbase. However, for countries with strict capital control laws, such exchanges may not be permitted to operate in those jurisdictions.