Bitcoin currency exchanges work in a manner
similar to banks. One first deposits amounts of
money in the currencies supported by the
exchange, to his own account in the exchange,
uses these balances to trade with other users of
the exchange and then withdraws that money.
Unlike over-the-counter transactions, there is no
risk of losing money due to people not fulfilling
their part of the deal, as long as the exchange
itself does not commit fraud or withhold money.
Exchanging is done by placing "buy" or "sell"
orders, which the exchange system software then
matches with each other. "Buy" orders (or "bids")
are offers to buy bitcoins in exchange for another
currency at a maximum price-per-bitcoin which
is set by the offerer. "Sell" orders (or "asks") are
offers to sell bitcoins at a minimum price-per-
bitcoin. If the bid price of a buy order is higher
than the ask price of a sell order, an exchange
can be performed and either the bid order, the
sell order or both can be removed from the
"order book". Thus, at any given time, there is a
price above which there are no more buy orders
and a slightly higher price below which there are
no more sell orders.
Communication with the Bitcoin currency
exchanges is commonly done using a standard
web browser, over a secure SSL connection.
Exchange Rates and Market Forces
Early in the life of Bitcoin, the currency showed
some major fluctuations in exchange value,
ranging from under $50 to $266 US. The
exchange rate of Bitcoin has shown relatively
stable growth since the beginning of 2013.
According to Currency.Wiki
[1]
, as of February 01, 2014, the current exchange
rate for bitcoins is at $959.58 US. The all time
high for the value of a single bitcoin was on
November 17th, 2013 when it reached $1216.73
US on the Mt. Gox exchange.
Bitcoin has been criticized by economists for
bubbling up around itself, similar to the housing
market in the US before the crash and it is true
that Bitcoin has shown a tendency for rapid rises
and crashes in price. However, given the
instability of the global economy, Bitcoin has
proven to be a reliable investment compared to
many other popular currencies. In particular the
European debt crisis gave rise to a large amount
of currency being converted to bitcoin to keep it
safe from the falling value of the Euro. These
investments in turn drove up the value of the
bitcoin thanks to its unique production method.
Despite the growing popularity of bitcoin
transactions and the generally rising price,
several events have shown an inability to
withstand major blows to its reputation. The FBI
seizure of around 26,000 bitcoins from the drug
distribution website Silk Road more than halved
the value of individual bitcoins. Technical errors
have also proven to be a difficulty for
speculators on the exchange value of the BTC. In
April of 2013, a backlog of transactions shut
down the Mt. Gox website, causing a drop in
value from $266 to $77 US.
While it has become easier to buy and sell
bitcoins with the influx of bitcoin exchanges
across the world over the past couple of years,
the availability of access to the currency has
been one of the greatest sources of variability in
its exchange rate. Because of looming
government regulations, most notably the U.S., it
has been a challenge to convert your local
currency into Bitcoin, which has led to highly
variable prices based on geography, which, for a
currency which is designed to be borderless, has
proven to be an issue, given that so many
bitcoin users treat their bitcoins more like an
asset than a currency. That is to say, they intend
to hold onto their BTC until they decide to
convert back into their local currency, rather than
spend it online for anonymous transactions.
