Bitcoin Basics: How do Bitcoin ATMs work?

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In this podcast published in March 2020, you will hear Gordon and Faris from CoinCompass answering questions on how bitcoin ATMs actually work.

The concept of this podcast is for people to send their questions related to Bitcoin ATMs for Gordon and Faris to answer. It’s not going to be too much technical or too much economic detail but simply the basics of Bitcoin – those questions you thought were too silly to ask but actually are not.

The question addressed in this video was related to the local currency. A listener was wondering on who determines the currency rate and how does that rate reflect by how reliable Bitcoin is, presuming that ATM provides the local currency.

Gordon compared the Bitcoin ATM to regular ATMs where you can go to any foreign country and withdraw the local currency, so it works as a kind of exchange. It also goes the other way around where you can deposit the local currency and receive cryptocurrency in exchange. Usually, you cannot do both on the same machine, you can either withdraw or deposit even though there are two-way machines [Editor’s note: this is actually false, there are either one-way machines, which allow to buy cryptocurrency, or there are so called “two-way” ATMs, which allow to buy and sell transactions. There are no only sell machines, unless the operator is low on cryptocurrency liquidity and disabled buy transactions].

Further on, Gordon explained how ATMs work in his experience when you want to withdraw the local currency. So, you go to the machine and select “withdraw”, on the screen. Then you enter the amount of the local currency you want to withdraw, after which you will need to send a certain amount of crypto in exchange. The way you do that is by using specialized software called a “Bitcoin Wallet” that you install on your phone and use to store your Bitcoin. After you selected the desired amount of money, the machine will print a receipt for you. On that receipt, you can see the amount of both fiat and crypto that you want to exchange as a kind of the last check before you proceed on to the actual transaction. There should also be a QR code that represents the Bitcoin address of the ATM, in other words, a way for your wallet to know where to send the Bitcoin. In order to initiate the transaction you need to scan the QR code via the wallet on your phone. After about 5 minutes, the ATM will receive your order and it will actually send you an SMS with a separate 6-digit code that you need to enter back on the machine. After you completed these steps, the only thing left is to take your money.

Another part of the question was related to the currency rate. Faris jumped in here, explaining how this part is also comparable to fiat currency. He cited Thailand as an example where you can exchange your money to local currency pretty much anywhere but the rate differs from place to place, so you can search for the best deal. In the same way, the cryptocurrency exchange rate is determined by the ATM itself. For example, you can sell your Bitcoin at $6.500 but if you want to buy it back it will be $6.700. This difference in price is called the “spread”. That’s how the ATM companies make money they need to cover the expenses of maintenance and rent since they do not charge you fees for opening your account or any other monthly fees, unlike the regular banks.

Further Gordon mentions that days of bitcoin ATMs are numbered as we move to cashless society, and they are going to be replaced with crypto debit cards, where people spend cryptocurrencies using cards.

To summarize, Bitcoin ATMs are fairly simple to use, you just need to pick a wallet that you want to use and follow the steps on the machine. There are a bit more steps than on the fiat ATMs, but this is to ensure that all transactions are as secure as possible. The Bitcoin ATMs work on the same principle as regular fiat exchanges when it comes to the exchange rate. There is a difference in the buy and sell price called the “spread”. That way the Bitcoin ATM companies make money and manage to operate while not charging any other fees, unlike regular banks. So when you draw the line, the Bitcoin ATM has a couple of more steps that you need to follow in order to get your currency, while on the other hand, the regular Banks will charge you a lot more fees in exchange for their services.

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