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I know well that I can sell and buy cryptocurrencies like BTC and ETH on exchanges like Coinbase, I do it almost every week.

But my question is: how does an exchange materially convert dollars or euros to bitcoins? If I were the exchange and a user gives me one hundred dollars and tells me to "convert them to bitcoins"; what is it that I as the exchange then do?

2 Answers 2

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You find some other people who want to exchange Bitcoin for dollars.

It's no different to exchanges that exchange dollars for euros.

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  • Ok but if I give you dollars and you give me bitcoins, first you need to have those bitcoins. Where you take them? You buy them from where?
    – Jepessen
    Commented Feb 4, 2022 at 10:08
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    The exchange buys from someone who wants to sell. This is not complicated, there is no secret mechanism. Commented Feb 4, 2022 at 10:09
  • But according to some source, at the moment in the market there are only 13 million of bitcoins, while the maximum is 21 million. Where the exchange will buy the missing bitcoin when they will make available?
    – Jepessen
    Commented Feb 4, 2022 at 10:12
  • From miners who want to sell bitcoin they have mined. Or from people who bought from miners. Or from people who bought from people who bought from miners. Or ... But remember that people who buy Bitcoin from miners are sometimes in fact just people who sell equipment or sandwiches to miners. Commented Feb 4, 2022 at 10:12
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    Exchanges have no special role in Bitcoin. Bitcoin was designed to work without any exchanges. Miners do not have any special checking role either. They don't do any checking that other people havent already done. No one relies on miners to do checking. No one has to trust miners. Commented Feb 4, 2022 at 10:16
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Exchanges are platforms for users to trade currencies with other users.

The usual flow is that users deposits dollars, euros, bitcoins, or whatever into their account on an exchange, and then use their account balance to offer a trade for whatever they want to acquire. The exchange merely offers the platform, matches and executes the trades, and facilitates deposits and withdrawals. The exchange itself is not participating in the trades. Since users can only trade whatever balance they have in their accounts, the exchange also guarantees that the counterparty has the funds to participate in the offered trade.

There is another distinct business model, called a brokerage, where users directly purchase from the platform. In that instance, the brokerage is the counterparty for all trades and must acquire stock to sell, e.g. from miners minting fresh bitcoins, exchanges selling off the trading fees they collected, or market makers with large holdings.

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