What happens to cash used to buy bitcoins?

Question

Are there any requirements to Bitcoin exchanges [USD/EUR/etc], as to for what the [USD/EUR/etc] may be used? Or is the [USD/EUR/etc] received property of issuer of bitcoins?

Unfortunately, this is not decribed anywhere.

Answer 1

Bitcoin exchanges, like stock exchanges, act as a middleman for people that want to trade bitcoins. They do not sell/buy their own bitcoins or US Dollars.

Suppose that I have 10 bitcoins and I want to sell them at $5 each. In order to do that, I can use a bitcoin exchange and put a sell order at $5 for 10 coins. This is a way of "announcing to the world" that I will sell 10 coins to anyone who is willing to pay me $50. If you want to buy them, just login to the exchange and put a buy order at $5. The exchange will match our orders and I will receive your $50 and you will receive my 10 bitcoins.
When a buy order matches a sell order, a trade is made. This is how the bitcoin price is defined.

Now suppose that you want to buy bitcoins, but you are only willing to pay $4.9 for each bitcoin. You will put your buy order at $4.9, but it will not match mine because I only sell if you pay me $5 per coin. The amount of pending orders defines market depth.

For example, you can see here the market depth for MtGox. The bids table show the price people are willing to buy at and the asks table show price people are selling at. MtGox Live is also a nice way to visualize these concepts.

Note that bitcoin exchanges charge a small fee (currently around 0.5%) each time they match an order. So in the previous example I would receive $49.75 and you would receive 9.95 bitcoins. The rest is kept by the exchange for their services.

Answer 2

Exchanges just bring buyers and sellers together. Generally speaking, they have no legitimate interest in what the buyer does with the Bitcoins or what the seller does with the money. If you buy a bicycle on eBay, should eBay care why you want the bicycle, where you got the money to buy the bicycle, why the seller wants to sell the bicycle, or what the seller is going to do with the money?

Your use of the word issuer suggests that you may not quite understand how Bitcoins are produced in the first place. Bitcoins are generated when new blocks are mined, with a (currently) 50 Bitcoin 'reward' going to the miner who mined the block. This reward compensates for the costs associated with maintaining and securing the Bitcoin public block chain which publishes the transactions.

And, of course, the seller may or may not have personally mined the Bitcoins they're selling. It's also possible they received them in exchange for something else.

Answer 3

That's the billion dollar question and no one seems to understand what you're asking

The answer is probably what you suspect. There's a pool of millions of $$ that fills up the basements of exchanges that just keeps growing whenever anyone funds their account with $ to purchase crypto from a seller they got matched with. Because that seller never gets that $ only simulated exchange money which we treat as having the same value because of the misplaced confidence that it's the same thing

But it's actually very close to worthless because the exchanges will never allow anyone to withdraw in a big way... why would they when they can just Mt.Gox it when too many people start coming after the money they think is waiting for them

When all crypto corrects to near zero when the exchanges start to cut and run most people probably won't even understand why

crypto is real. it has value. and that value is whatever it was when we only had a system like localbitcoins to trade it.

but the exchanges? they're ponzi schemes

99.9% of people engaged in trading crypto are in for the rudest awakening imaginable