Economics education

An Economics Education by Bitcoin – Part III

There are a number of these Web-based Bitcoin wallets from which to choose, and they have different features, costs, and reputations to review and consider. Do you need merchant tools? Do you need currency exchange services? Do you need “cold” vault storage? Do you want multi-factor authentication? Whatever you need, there’s someone out there offering to provide it for you.

Once you’ve created an account and a wallet, how do you get Bitcoins? There are two obvious answers. First, if you already had money in one currency and wanted to convert it to a different currency, you could exchange it. Second, the same way that you sell goods or labor for your local currency, you can sell goods or labor for Bitcoin. I explored both of those options.

Bitcoin exchanges work similarly to traditional currency exchanges. There are competing firms with different appetites for various currencies, and they adjust their exchange rates accordingly. There are some with teller’s windows you can visit in person, and there are even automated ones, like ATMs, which accept currency, credit cards or Bitcoin, and dispense currency or Bitcoin. I prefer to perform my transactions online, so I researched the various online exchanges. At each, to buy Bitcoin, you must establish and fund an account and then place an order to buy or sell Bitcoin – and there’s a spread, just like securities. In these regards, it’s similar to a traditional brokerage account, but without the SIPC insurance. If the exchange gets hacked, shutters itself, or is otherwise compromised, your deposits could be temporarily inaccessible or permanently lost. This has already happened to a couple of Bitcoin exchanges, which reinforced my prior mental note to reevaluate my risks if my balances become significant.

Next I updated my business Websites to indicate that we accepted Bitcoin. I figured I could avoid the fees and the bid-ask spread if I could just get someone to pay for my goods or services at the spot price. Years later, having not earned a single Bitcoin, I returned to my study of exchanges.

If you’re not familiar with Level-II stock quotes or “depth” charts, it’s basically two lists. One list tallies and ranks in price order all the outstanding “buy” orders for a specified equity, showing the number demanded at various price levels; the other similarly ranks “sell” orders. When someone places a “market” order to buy ABC, the outstanding “sell” orders for ABC are matched in price order. Thus, if someone is selling 100 shares of ABC for $30 and someone else is selling 500 shares for $31, all 100 of the $30 shares will be consumed before a single $31 share will be sold on that exchange. Bitcoin exchanges work the same.

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