In the past, people looking to buy or sell Bitcoin had extremely limited choice. For most, this limited choice translated to a process that required both a high level of effort and even higher appetite for risk.
To give you an idea, many of the earliest investors into Bitcoin did so by authorising international bank transfer payments across the globe to an (at the time) all but unknown Tokyo based exchange called Mt.Gox. To add to their comfort, this was not an exchange built by some Wall St. corporation or a group of nifty financial markets professionals with decades of experience, but instead it was a repurposed Bitcoin exchange originally built to facilitate the trade of playing cards for the popular card game Magic: the gathering. While many have by now heard about the February 2014 demise and collapse of Bitcoin's first exchange Mt.Gox; concluding years of successful operation with the loss of over 850,000 Bitcoins, it may be a surprise to to learn that innovation and maturity entering the ecosystem never faltered; the spectrum of offerings to invest and trade the cryptocurrency asset class has continued to do nothing but move onward and upward.
As a result, people looking to gain varying levels of exposure to Bitcoin and other cryptocurrencies now face an entirely different problem. Too much choice, and more specifically, too much uncertainty in how to evaluate that choice. By having a simple understanding about the different types of businesses that enable cryptocurrency trading, how they operate, and how they stand up against respective competitors, even the newest investor or speculator can quickly be empowered to make a more informed decision about which businesses they interact with and ultimately, capture more value.
Operations and Growth
The eternal-bull crypto trader. James drives operations and growth at HiveEx
When buying or selling Bitcoin and other cryptocurrencies, we should start with three great rules that can lead to significant improvements in maximisng your trade value and influence who you choose to trade with.
1. Fee’s are not a reliable indicator of value
Investors and traders should instead focus their attention toward the amount of value that will be received after completing the trade - the net value.
Why? Because different places you go will have different prices for the same asset. This can make fee comparison alone unreliable for identifying the best value.
Choosing where to transact ultimately comes down to finding your desired balance of value extraction against other service offerings such as support, security, features, speed, reliability and convenience.
2. The Convenience Cost
There are many services for buying and selling Bitcoin that charge have what can largely be considered a ‘convenience cost’.
This cost can be measured by looking at the lost amount of value compared to if the trade was carried out elsewhere. It's an opportunity cost.
An Exception It's worth noting, 'convenience cost' has far less relevance for larger size trades that push past ~$50,000 in notional value.
Trades of this size can attract better pricing though over-the-counter (OTC) offerings such as HiveEx.com. We're a highly specialised businesses who leverage our high volume and negotiation strength to access institutional pricing and global liquidity not readily available to retail audiences. HiveEx offers high touch service and convenience, 24/7/365 availability, market analysis and dedicated trade-room support to all clients.
Understandably, not everyone can access OTC trading, as much as we would love (and hope to eventually) help on that front.
3. The Awareness Cost
Knowledge is power, they say, and the same is true for those looking to get the most out of their trading. A little understanding behind the business models behind who you trade with can go a long way in helping this.
Fees vs Spread Most people understand fees: a fixed amount or percentage in value added as the cost of conducting business or trade.
Less familiar to many however, is spread. A spread is the difference in the highest price someone will pay for an item and the lowest price of which another is willing to sell that same item.
An Example Jack is willing to buy an apple for $1.00. Amy is willing to sell an apple for $1.10
The spread, or more formally, the bid/ask market spread, is simply the difference: $0.10c.
We will see below how some businesses make money by modifying spreads, fees, or both; and why this can impact value for your trading.
Why do Bitcoin prices vary between exchanges?
You may wonder why the prices you see for one asset vary depending on where you look.
To understand this, it might be useful to think of exchanges and market places instead to be playgrounds where kids are trading playing cards.
There’s going to be different kids in each playground with types and quantities of playing cards, some rare, some common.
As trading goes on, each playground forms an apparent market value for the respective playing cards, and trading is restricted to those physically in each specific playground. This may lead to different levels of willingness to buy or sell the playing cards at different levels within a specific playground, with smaller playgrounds having less selection or more accurately, buy and sell demand.
Naturally, if you extend this to imagine what would happen if a rumour were to spread that someone at a separate playground down the road is willing to pay more for a card you were looking to sell, it could be well worth the walk down the road to sell that card. An enterprising mind might take this a step further and first buy up the other cards on their local playground before heading off and exchanging elsewhere for a profit.
In trading, this is called arbitrage, and it is what drives exchanges to eventually finding similar price levels as any budding arbitrage opportunity is snapped up by those in the know.
Depending on your investment or trading strategy and preferences, all trading ultimately falls to the below categories.
Automated and hands-off services
Order book Exchanges
Each of these categories are broken down and explored below, weighing their suitability to different requirements. The goal is to make an informed choice that balances most closely with your needs, as these will vary significantly between investors.
One-click services are platforms, websites or mobile applications that focus on removing complexity and high convenience. These services allow you to open and verify an account within minutes, link a credit card or bank to deposit funds, type in a dollar value and----click. You’re done. They are designed for simplicity, and are heavily marketed towards those with the least familiarity to the investment or cryptocurrency space.
Convenience - High
Complexity - Low
Competition - High
Fee/spread - High ($$$$)
Price Value - Low
How to identify single-click Bitcoin services
These services will appear simple to use with minimal design.
There won’t be an overwhelming amount of charts or tables, and pricing will be clear and straight forward. These platforms will simply let you enter the amount you want to buy or sell, show you a price and let you click to complete.
If you’re feeling overwhelmed, chances are you're not looking at a ‘one-click’ service, or at least one worth its salt. It should feel bam bam bam!
Benefits to using one-click Bitcoin services
They’re designed for people who might find the space largely foreign and are looking to trade off some value for the easiest route to gain exposure.
Think of it as requiring a 'lunch-break’ level of involvement to tick off. Easy!
Downsides to using one-click Bitcoin services
You pay for it in the form of opportunity cost. Remember, convenience costs value. (See how they work next)
How one-click Bitcoin services work
The vast majority of these services simply source their pricing from larger exchanges, increase the spread they display to customers, and further add fees on top.
It’s not uncommon to see fee’s as high as 4-5% of the trade value, and this is in addition to any change to the spread they display which could also be several percent wide (and not disclosed).
When a customer accepts a price to by or sell on a one-click service, the business they're interacting with is more than likely executing that exact order size themselves elsewhere to buy it cheaper and lock in their own revenue. Think about the playground analogy mentioned earlier. They're creating the opportunity for themselves by making theirs easy to use you.
Also consider Depending on how much the spread of an exchange is modified, a one-click service charging 5% in fees versus another service charging 2%, could very well come out to give you the same amount of Bitcoin! This is why placing greater importance on looking at net value extraction once the trade has been completed is valuable.
Overall Takeaway for using one-click Bitcoin Services
These services can provide a wonderfully fast and easy experience that can be great for people new to the space. As a consumer however, you should recognise that you do have the choice to circumvent the significantly higher fees and wider spreads by going elsewhere for a better price, such as an order-book exchange. (explained below)
Lastly, it’s valuable to recognise that while fees may be transparent on ‘one-click’ platforms, any change they add to the spread they access from another exchange is likely not disclosed.
There’s a few perfectly legitimate reasons for doing this, as the business itself is likely taking on market risk by needing to also trade elsewhere. If they fail to do this quickly and the market moves, they can lose out on locking in their revenue. Unless you know how to look at other order book exchanges it can be difficult to see just how much spread is being added, and whether it's far higher than necessary to protect against risk.
Automated Bitcoin services exist to enable a periodical purchase of Bitcoin or cryptocurrency.
Trough periodical fixed dollar value debits, automated services will reliably purchase Bitcoin for you as often as you set, such as weekly or monthly, with an account that can also be funded automatically; straight from your paycheck or credit card!
They are designed and marketed towards investors wanting to effortlessly accumulate and average their investment into Bitcoin, and specifically, those who are willing to trade value for the convenience despite some fairly important risks to consider.
Convenience - High
Complexity - Low
Competition - High
Fee/spread - High ($$$$)
Price Value - Low
How to identify
Platforms, websites or mobile applications that offer an easy way to sign up, link accounts, set your limits, approve and forget about it. Automated services are essentially the same as one-click services, instead solving for on-going purchases to average investment over time.
Benefits to using automated Bitcoin exchanges
Easy, reliable and effortless, similar to one-click services.
Downsides to using automated Bitcoin exchanges
You pay for it in the form of opportunity cost. Remember, convenience costs value.
In addition to the same downsides as one-Click services, there is higher risk attached to using automated services.
Due to the non-presence of the investor at at the time each periodical transactions is carried out. There is an opportunity for abuse by the application provider. This does not mean it necessarily happens, but the opportunity for abuse here lays in tthe providers ability to increase their revenue margin by increasing the spread they buy your Bitcoin at well beyond what would be reasonable.
Clarification should be sought with regards to exactly how the provider conducts the transactions and ensures transparency for this.
How automated bitcoin exchanges they work
In practice, automated Bitcoin purchasing services work and have the largely same considerations set as one-Click services, with additional risk outlined above.
Though it can be nice to set and forget, knowing that you're gradually building a position and keeping skin in the game, the trade-off of value for convenience is well worth considering.
Order book exchanges, more commonly referred to as simply 'exchanges', are the most widely used platforms to trade cryptocurrencies. They are marketplaces where account holders have far greater control over the level of complexity and involvement they are wanting to undertake. Those still wanting a service akin to ‘one-click’, can achieve this, but do first need to become acquainted with platform. Once familiar, using exchanges can be just as quick as other options and prove to be much better value for money too.
Convenience - Medium to High
Complexity - Medium to High
Competition - High, varies by region
Fee/spread - Low to medium, varies by exchange
Price Value - medium to high, varies by exchange
How to identify
Order book exchanges are identified by the inclusion of a publically visible orderbook. This is a live and updating table that informs users of the exchange being used about where other participants (counterparties) sit in their willingness to either buy or sell.
Users choose to buy or sell either at the current market value, with this action being matched against the best price that exists in their buy or sell direction, or they can place a ‘limit order, which means sitting in a queue (the order book) at a price that they desire.
Limit orders are unlikely to be instantly executed, but carried out if the market moves in the direction towards where the buyer is looking to buy, or seller to sell. Placing a limit order is not a guarantee to get the price desired, and if the market never goes in your favour, it may never execute at all.
Benefit of buying Bitcoin on an Exchange
Users can choose to buy or sell either at the current market value (matching against the current best price, or they may place a ‘limit’ order.
Limit orders allow the user to stipulate the exact price that they are willing to purchase or sell the asset. It is these orders which form the order-book. Limit orders are not likely to be instantly executed, as first the market needs to move in the direction of where the buyer is looking to buy, or seller to sell.
Placing a limit order is not a guarantee to get the price desired, as other participants might drive the market against your favour.
2. Visible spread
Because there is an order book, anyone can calculate the spread of the exchange. For this reason, exchange do not make revenue from spread, as it is not determined by them but rather the orders placed by users.
3. Lower fees
Exchanges tend to have far lower fees with many well below 1% (as opposed to the 5%+ of automated and one-click platforms).
Downsides to buying Bitcoin on an exchange
1. The learning curve
The perception of a learning curve will vary massively on who you are as an individual, but there is a learning curve to using an exchange and especially so if you have never used something similar before.
Fortunately, take confidence in the fact that millions of people have crossed this path before you and there is an enormous amount of resources out there to explain the in’s and outs. In addition to this, all exchanges are competing to make their experience smooth and easy to understand, after all, Bitcoin is now 10 years old and the offerings available have come a long way.
2. Reliance on liquidity
A good exchange has lots of buyers and lots of sellers. Liquidity can be viewed as the impact that the purchase or sale of an asset has on moving the overall market price of the asset. A highly liquid asset would mean people can easily sell it without driving down the value, or purchase it without driving the price higher.
Depending on amount of Bitcoin you are buying or selling, there may not be enough available on the exchange for the current best price. Slippage occurs when the quantity you are looking to trade can not be exchanged at the current best price, and can only be acquired by paying a higher amount to fill the order against other sellers who set their asking price higher. you want you must buy through multiple orders that sit on the book.
Regardless of fees (which must also be taken into consideration), the reality is that the larger the amount you are looking to buy or sell, the more you are likely to be impacted by slippage.
How exchanges work
The exchange takes custody over account holders assets. This might be fiat currency such as USD that has been deposited onto the exchange, or through the user sending Bitcoin they own onto their exchange address associated to their account.
Users place their orders on the exchange, or use the market order function to execute their order immediately, and the exchange then uses a matching engine to execute the order against the book of buyers or sellers, making revenue in fees and finally crediting the parties to the trade with with their respective balance.
For this reason you are trusting the exchange, not the other users, and exchanges make revenue by facilitating this service. Fees will vary by exchange, and can be found on the exchange websites.
An exchange with better liquidity but higher fees, may still yield the best result if your entire order can be placed and carried out at a better average price than an exchange with low fees but thin liquidity.
Order-book exchanges have a high value reward pay-off for those willing to spend an afternoon or two of their time learning how they work. Once familiar, they are easy to use and fees are significantly lower than services designed to cater for high convenience.
Lastly, the larger the exchange, the more readily you can feel comfortable that they will act professionally, protect your assets and be consistently online for you to use on short notice.
Over-the-counter (OTC) cryptocurrency trading is reserved for the purchase or sale of large quantities and high value orders. OTC trading is conducted through a network of global partners and institutions that provide stronger pricing against these larger sizes. The outcome can mean a far higher level of value extraction when compared to retail offerings.
Convenience - Medium to High (initial overhead but high service)
Complexity - Low
Competition - High, competing globally
Fee/spread - Low
Price Value - Very High
Benefits to buying Bitcoin OTC
OTC trading secures stronger pricing through accessing highly price competitive institutions capable of possessing or access the level of volume required without impacting the market. Many Bitcoin purchases made OTC would easily take an drive the order book of a retail exchange if they were executed through the book. This is due to the thin liquidity available in comparison.
There is no slippage when trading OTC. Single price agreement is reached between parties for the entire trade volume, and the trade is closed entirely at that price. Slippage only occurs on order book exchanges where the purchase or sale of large quantities means a requirement to take out different prices up or down the order-book in order to successfully fill the volume being bought or sold.
Privacy of trade
Large orders can be executed in market without impacting the overall price as only the parties involved in the trade are aware of it's occurrence. Large orders executed over exchanges often influence immediate and dramatic shifts to the wider market price and negatively impact value extraction as a result.
Downsides to buying Bitcoin OTC
There is limited automation available as the industry has largely formed out of traditional brokerage offerings. While the exchange space has developed significantly in terms of automation and self-check out, trades executed OTC are often completed over phone calls or messaging services. HiveEx for uses dedicated trading rooms for trade execution over Skype, WhatsApp, Telegram and WeChat based on client preference.
Due to the regulatory requirements for thorougher KYC/AML and the significance attached to trading large volume, OTC providers generally do not offer instant on-boarding as might be found with exchanges. Exchanges will often conduct this for accounts looking to increase deposit/withdrawl limits.
How over-the-counter Bitcoin services work
While the amount of volume bought or sold on order-book exchanges can be monitored over time, each day hundreds of millions of dollars in cryptocurrency is traded between institutions, funds, trading houses, high-net-worth individuals and more.
For clients trading with HiveEx, funds are deposited and conversation takes place in dedicated trade rooms between the trading team and client. Clients request their respective market and pair, such as “Buying $100k Bitcoin USD”, and HiveEx returns with our live market price. As an OTC trade, this price is in total with no further considerations, and HiveEx makes its revenue on a variable spread for the trade. This spread further takes into consideration the volume of the trade, current volitility of the market and market risk that HiveEx as business may wear during the trade.
Compare providers and focus evaluating the total net value able to be extracted and weight this further with the value you place on high availability, service, insight, speed and dedicated support.
Regardless of your trading strategy, large trades nearly always fair better when traded over-the-counter. Exemptions to this are largely reserved to those with advanced cross-exchange execution technology though this is often not enough. HiveEx works with clients to meet trading needs and is flexible in tailoring capability to find solutions that see client value maximised.
The goal of this guide is to leave you empowered to self-evaluate the services you might consider when buying or selling Bitcoin and cryptocurrencies.
Maximising value can be achieved with two easy steps
Knowledge - understand the ecosystem, research your options and their fee structures
Time - Try new platforms, learn what features they have.
The final recommendation is this: Don't trade-off value simply because of an assumption that other options are too difficult to use or meant for more serious traders. Try them first. The vast majority of trading by retail investors (<$50,000) is carried out on order book exchanges for good reason, once familiar, most people find these platforms cater to their needs or justify the little effort required to capture more value.
HiveEx is a trading name of Hive Empire Trading Pty Ltd, a subsidiary of Hive Empire Ventures Pty Ltd. Hive Empire Ventures (trading as Finder Ventures) is a related party of Hive Empire Pty Ltd, which owns and operates finder.com and finder.com.au