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If I have a balance in USD with any exchange, and I placed an order to buy bitcoins, how does it work for the exchange? do they need to hold enough bitcoins to cover all the "buy" transactions and sell those bitcoins to me from their wallet? or, they will find someone on their platform who wants to sell that amount at that price and withdraw his bitcoins to my bitcoins?

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Traditional Bitcoin exchanges hold their customers' funds, both Bitcoins and counter-currencies. So when a trade is actually made, the exchange just adjusts their own balance numbers. Prior to being able to buy Bitcoins, you must deposit some other currency into your account at the exchange. Prior to being able to sell Bitcoins, you must deposit Bitcoins into your account at the exchange.

  • What if someone tried to buy a larger amount of bitcoins than is the sum of the offered bitcoins by the user of that exchange? – Alex Popov Jan 22 '15 at 10:55
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    @AlexPopov That offer would stay on the books until people satisfy it. – David Schwartz Jan 22 '15 at 20:00
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While choosing a bitcoin exchange, look for an information about where do they keep funds. If they say that they 100% of funds of customers is being stored in cold wallets, it means that they actually hold enough bitcoins to cover all transactions.

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