Although there is no lack of Bitcoin exchanges available for people who want to invest or trade in BTC, there are a few things you should know before you get started. Transferring your money over to an exchange can be an arduous process at times. Hopefully, it will get easier in the future, but right now it takes a certain degree of thought and planning.
Bitcoins are not easy for people to acquire. If you’re able to objectively evaluate a few things before deciding on one, you might be better off than choosing the exchange that has the best-looking website.
Let’s cycle through some of the characteristics you need to consider when choosing an exchange.
Liquidity
Because Bitcoin is traded on a market where people are both looking to purchase or sell the currency, it’s important to take into account the amount of liquidity that an exchange has. Liquidity is the ability to sell without the price being significantly affected, causing the price to drop. The more buyers and sellers there are, the more liquidity that exists. So, what method can you use to tell how much liquidity an exchange has? One word: volume. Take a look at the top exchanges by trading volume as calculated by Bitcoincharts.
| Exchange | 30 Day Volume |
| mtgoxUSD | 1,209,589 |
| bitstampUSD | 257,123 |
| mtgoxEUR | 149,444 |
| btceUSD | 143,780 |
| btcnCNY | 118,710 |
Those 30 day numbers represent the total number of Bitcoins that have been traded on each exchange. And while Mt. Gox has had its share of problems, many of them can be attributed to its own growing pains. Mt.Gox is by far the largest exchange and it very often offers the highest selling price for Bitcoins. This creates a network effect that allows them to become larger and larger as more people join that exchange.
Fees
The process of buying and selling Bitcoins costs money – that’s the incentive for exchanges to be run as businesses. However, unlike buying a stock or bond, Bitcoin exchanges are in the practice of charging a percentage. This is in contrast to discount brokerages commonly used by investors in the US that charge a flat rate fee. Because of the percentage model, buying and selling Bitcoins over time can get very expensive.
| Fee % | 30 days USD volume |
| 0.50% | < $500 |
| 0.48% | < $1,000 |
| 0.46% | < $2,000 |
| 0.44% | < $4,000 |
| 0.42% | < $6,500 |
| 0.40% | < $10,000 |
| 0.38% | < $15,000 |
| 0.36% | < $20,000 |
| 0.34% | < $25,000 |
| 0.32% | < $37,500 |
| 0.30% | < $50,000 |
| 0.28% | < $62,500 |
| 0.26% | < $75,000 |
| 0.24% | < $100,000 |
| 0.22% | < $150,000 |
| 0.20% | > $150,000 |
Source: Bitstamp’s fees section on its website.
This fee schedule from Bitstamp is a common structure for Bitcoin exchanges. They will often charge a higher percentage fee on a sliding scale that is based on volume. The more volume that you trade per a thirty day period, the less percentage that the exchange charges. This can be challenging for conducting many transactions since one would need to calculate percentages constantly to factor in the mathematics of trades. But the exchanges make a lot of money this way, and until an exchange with high volume starts charging flat-rate commissions – a kind of “discount Bitcoin brokerage” – this is the way that things will be.
Proximity
Bitcoin is still a relatively unregulated currency, but that is going to change over the long run. As there is more exposure in the media and financial industries regarding Bitcoin, governments will inevitably want to exert a degree of control over it as a transmission of monetary value. This is because they want to ensure that it does not become an instrument for illegal activities. Money laundering, terrorism and illegal drug smuggling are a few of the reasons why authorities have interest in monitoring Bitcoins.
Top Exchanges by Volume and Their Location
| Exchange | Country |
| Mt. Gox | Japan |
| Bitstamp | United Kingdom |
| BTC-E | Russia |
| BTCChina | China |
| Bitcoin.de | Germany |
Because of this, it is important to consider the geographic location of a Bitcoin exchange before you choose one. The location that the exchange decides to do business in will dictate what laws it will have to comply with. Most countries have not even issued guidance on Bitcoin activities like the United States’ Financial Crimes Enforcement Network (FinCEN) has, but if and when many of them start to do it, it could affect your ability to transact in Bitcoins. If you have familiarity with a particular country’s financial laws and regulations, you should probably pick an exchange that does business there.
Accessibility
An unfortunate reality for Bitcoin at present day is the risk of exchanges being attacked. The purpose of doing this is to change the perception of Bitcoins in order to profit from price swings. Bitcoin is volatile, and an attack that causes the price to drop is something that malicious hackers can profit from. This has affected the top exchange, Mt. Gox, significantly this year to the point that in April they released specific information about what they are experiencing.
One tool that can be used to measure a site’s accessibility is something called host-tracker. Simply enter in the exchange URL you wish to check, and the tool will try to access it from different hosting partners around the world. You can even set up email or SMS alerts that will allow you to track a site’s uptime over a period of time. Accessibility to an exchange is obviously important; you have to factor in an exchange’s risk of being attacked for monetary reasons in your decisions to choose one.
If you’ve made the decision to purchase Bitcoins, you also have to make a choice about which exchange to use. This is something that should be done with some considerations in mind. Not all exchanges are made equal, and everyone has a special set of circumstances. Because of this, it is important to think about liquidity, fees, proximity and accessibility as well as your own personal situation when choosing an exchange.
Tell us in the comments what you think. What is the most important aspect of a Bitcoin exchange that makes you decide to use it over others? What can Bitcoin exchanges do better?