Miners earn income in Bitcoin, but they don't always wish to hodl onto their stack. Luckily, there are a few ways to sell or lend earned Bitcoin for interest.
A Bitcoin or cryptocurrency exchange is a digital marketplace platform, similar to an online brokerage, where you’re given all the tools you need to buy, sell and lend Bitcoin. In this article, we’ll be looking at the different types of exchanges that are out there as well as the main functions they offer.
All of the ideas in this article are for educational purposes and do not constitute any form of advice. Compass receives no referral bonuses or other compensation from mentioning any of the products or services below.
It is often advisable for miners to 'hop' Bitcoin between different wallets before depositing at an exchange, or even use a mixing service to do so. Check out 'The OPSEC Manual' for additional information on best privacy practices.
Custodial exchange: A custodial exchange uses a specified company as the middleman between buyers, sellers and lenders. Exchanges improve prices and user experience at the expense of privacy and decentralization. They are typically best for those who prioritize simplicity over maximum privacy and decentralization.
Common exchanges used include Coinbase, Kraken or Gemini. Compass Mining does not endorse any exchange and is not responsible for any transactions conducted between a Compass client and an exchange when buying, selling or trading mined Bitcoin.
Non-custodial exchange: A decentralized piece of software, a non-custodial exchange facilitates transactions between buyers, sellers and lenders. It removes the middleman, thus prioritizing privacy over flashy user experience.
Non-custodial exchanges are ideal for bitcoiners willing to sacrifice the training wheels of a more customer-centric custodial exchange in order to take advantage of maximum privacy (no Know Your Customer (KYC)) and decentralization.
Bisq and HodlHodl are examples of non-custodial exchanges or lending services. Again, Compass Mining does not endorse or guarantee the services listed.
What services do exchanges offer?
Buying Bitcoin: The most common function of exchanges, both custodial and non-custodial, is simple: exchanging fiat dollars (or other cryptocurrencies) for Bitcoin.
The process will be similar on all exchanges, but here’s what it will look like on Kraken, one of the more popular custodial options:
Just make sure your bank account is connected, select the amount of Bitcoin you want to buy, and click each of the options above! That’s all there is to it.
Selling Bitcoin: If you have Bitcoin on an exchange that you’d like to liquidate for fiat dollars into your bank account, the process is just as simple as above. Find the “Trade” (or similar) tab in your exchange of choice, and make sure you have “Sell” selected as your order type.
Lending allows you to earn interest on your Bitcoin stack, with the trade-off being that you will be expanding your third-party risk profile to whichever partner you are transacting with, whether that be a custodian or a P2P (person-to-person) partner.
Depending on the platform, you take either side of the lending trade: lender or borrower.
Custodial: One of the most popular custodial lending platforms is BlockFi. On BlockFi, you can deposit your Bitcoin into a custodial account, where you will receive a monthly annual percentage yield (APY) on your stack. It’s essentially the Bitcoin version of earning interest on USD in a bank account.
Non-Custodial: There are no middlemen on a non-custodial lending platform like HodlHodl. Unlike companies such as BlockFi, HodlHodl is simply a piece of digital software, allowing both the lender and borrower to carry out the contract P2P without any third-party entity required.
Using HodlHodl as our example, all you need to do is select the proper filters on the main lending page (loan amount, term, loan-to-value (LTV) ratio) so the service can match you with the most ideal P2P partner. Once matched, HodlHodl will generate an encrypted escrow for both parties, so the contract can be fulfilled directly without any outside entity touching your keys.
Much like Bitcoin’s storage options, there are several different routes you can go for buying, selling and lending your Bitcoin through exchanges. Whether you’re looking for a streamlined, centralized custodial platform, or a privacy-first decentralized one, there is no “correct” answer for which one works best for everyone. Take some time to check out the examples listed above so you can decide which one works best for you!