Bitcoin Forum

Hello! I am so sorry if this is in the wrong topic, or if this question is so dumb, but, this caught me:

when I buy some Bitcoin/cripto from one exchange (like Binance, CoinBase...), how does they use my fiat money to get my BTC's? From where they get it?

Didn't found any related doubt, so, if you know how this works, would be awesome to share your answer here!

Thanks!

From the exchange's hot or cold wallets. Remember, you are not the only person participating in the trades through the exchange. While you are trying to buy the Bitcoin, There are some people out there who are also trying to sell off their Bitcoins for cash. So the Bitcoins they sell may temporarily be keep in hot or cold wallets waiting for you to make your purchase order so that they get transferred to you.

Oh, got it, thank you so much for the reply.

But just this alone doesn't create a cycle that may lead to a necessity of having more bitcoins in the wallets, thinking that the demand may increase higher than the holdings of the wallets? If so, where they get those new coins from and how do they pay for it?

In other words: if I buy BTC from the exchange, where does the exchange buy/gets the BTC that are available or may be needed?

I feel you didn't get JeromeTash's reply.

When you buy bitcoin on an exchange, you actually buy bitcoin from other users, not the exchange itself.
You deposit fiat and place a buy order. Someone else deposits bitcoin and sell it to you. After that, you will be able to withdraw bitcoin and the other user will be able to withdraw fiat.

So, for every satoshi added to a user's balance, one satoshi is deducted from another user's balance.

Oh! Grateful, my doubts got clarified by complete now. Thanks for the reply :)

The Bitcoin is always available in most cases, especially with big exchanges like Binance. When there is an increase in demand, this means a rise in Bitcoin price and with the rise in Bitcoin price, it means there will be more willing sellers at higher prices for profits.

If it's a small exchange with very small trading volume. They simply let you know of the maximum amount of Bitcoin they have available for sale. This is common mostly with instant exchangers.

We can simply put it this way - if there are buyers, there are sellers as well. So this is just a cycle and the supply and demand factor will determine the current price level. The OP should not be confused where the exchanges are getting their bitcoin because there also sellers of btc to their exchange. You will worry if there are only buyers, if that happens, I am certain the price of btc will skyrocket as the supply is limited.

You are not alone in that exchange and as you have faith currency looking for who to exchange with so also there are people there to who have one crypto currency or the other looking for who they would sell to. Exchange has now becomes you guys meeting point and that was why the exchange have to charge you for creating such an avenue for both of you that transact your business.

tldr for OP just for more clarity; it's pretty much like eBay — but instead of selling random stuff, everyone's buying and selling crypto. Exchanges really don't sell anything, they just charge an exchange fee for people buying and selling coins to each other. Just like eBay!

Exchanges are not only for buying, but both buying and selling. When you are placing an order to buy/sell your order gets matched with some other user(s) order(s) to add up to the amount that you have posted and the exchange occurs like that once the match is complete. It is a layman method to explaining but it sums up the complexities of how orderbooks operate.

If you are thinking how the coins come in, then I would say that miners getting subsidy is where the major selling occurs from. So that is a large part but then there are companies that run bitcoin based services, like casinos which is the biggest market for bitcoin and they do have to pay their employees and therefore they will sell bitcoin to get fiat.

Just assume that the coin is like a stone being exchanged and carries a value that you bought it with. This coin goes in circulation and money gets exchanged for that.

You can check the Bitcoin top 100 richest addresses and you will see some addresses from exchanges. They can be hot or cold wallet addresses.
https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

Because of hacks, exchanges have to separate their funds into hot and cold wallets. They have to use hot wallets to approve and process withdrawals from users and hot wallets must be topped off regularly. However, they don't store all their fund in hot wallets because when hacks happen, they will lose all exchange treasury.

Therefore, it comes to cold wallets for exchange treasuries. In addition, nowadays, exchanges use multi-signature wallets rather than single signature wallets so that if one of those wallets are hacked, it would be not enough to sign and execute transactions.

Bitcoin comes from mining, mining farms mine Bitcoin and in return cash is paid to purchase equipment, location, electricity costs, connections, and cooling costs. Mining is also an investment activity where miners sell part of the Bitcoin to be able to continue investing or expand it .

 - Then come the platforms, which play the role of intermediary, providing an interface that manages databases for users.
 - When the user logs in, he gets a balance in their database, deposits and withdrawals are considered an update to their database.
 - Platforms often keep Bitcoin in cold storage, and a small portion is kept in hot wallet (after analyzing databases to predict daily/weekly withdrawals).

The process continues by accepting money from you, deducting fees and providing the possibility of withdrawal.

For better understanding, you may search what is exchange actually,

That's how they manage. For spot trading just you are exchanging with others who bid to sell. For fiat, they just keep storing your funds and manage with the person who wants liquid for exchange of Bitcoin. That's the function of an exchange. When you are buying Bitcoin with the fiat commission is quite higher than spot trade with other coins.

I suppose some of the coins come from other traders selling coins on these exchanges as they are based on peer 2 peer setups but for a big chunk of coins that you need to get off the self, i suppose the exchange buys coins from other sources like miners and other exchanges and store them cold wallets.

Exchange sell people's Bitcoin for people's cash so they don't create bitcoin and sell it or buying from anywhere to sell it. Once you are in the exchange and completed few trades may get an clear idea about it. They simply matches trade order of the traders and execute it for that they are charging little bit as trading fee and their main income is from their withdrawals.

Haha, you question is kind of funny and a noob one indeed, but as it is commonly said, "one who ask questions never misses the road".
Like the first reply to this post have said, as you are trying to buy bitcoin, another is trying to sell bitcoin, this is why it's called a crypto exchange, you exchange yours for other people own, the platform(as an exchange) is standing in the middle to facilitate that by creating an avenue to make the exchange happen between the both partners and every other million partners out there, and in doing so, they get paid a commission in form of trading fee which both parties pay to the platform(exchanger).
Take for example, you want to buy USDT from binance using your fiat currency, binance will take your fiat currency and save it in bank account and in return, give you USDT which some other users have traded for fiat, in time, you or some other person will come around wanting to sell USDT for fiat, what binance will do is take your USDT and save it in thier wallet and send you your deserved amount of fiat currency from their bank to your bank (after they've minused their fees).

This may not be a true picture of the whole scenario as we know that exchanges also provide liquidity when starting up and use bots to trade and interact with real traders for buy or sell transactions. It's a general expectation for people to get skeptical depositing their funds into new exchanges until they begin to notice increase in trading volume on the exchange.

I think to further this exchanges can operate like banks or they are already doing that. The banks trade in different ways including taking money from client and loaning it to another for profit. Banks take money from many means including fixed deposit and free the money up for another person. So likewise exchanges , I think when they stake coins they are also probably doing some business under that.

Aside from other participants of the markets (buyers and sellers), there's also another entity called market makers who provide plenty of liquidity and orderbook depth which make it easy for us to trade regardless of the side of the market that we're on. The important thing when choosing exchanges is when they have plenty of liquidity in their markets and order book.

Other traders volume + market makers.

@JeromeTash reply is really clear to answer your questions.
There are many traders in an exchange, between the seller and also buyers.
And about if there is higher demand than supply, there will be influencing the price of Bitcoin. We should know one of the ways that Bitcoin will be increasing in all markets is because with higher demand than supply, the price will increase. The factor of demand and supply to influence Bitcoin price and also othercyrptocurrencies.
It is like if we are selling any goods in real life. There are buyers and also sellers, ad they also apply the factor of demand and supply.
You should not be worried about lacking Bitcoin, because the circulating supply will be always there in the market. That is why you can check on the order buy book or order sell book to see the suply. And that is why I suggest you to only by Bitcoin or cryptocurrencies in the reputable exchanges with high liquidity and volume.

Exchanges also have their own funds to provide liquidity, this is very necessary to every exchanges since not all exchanges have a huge users that’s why they still need to provide liquidity especially on fiat pairs. Buyers and sellers will meet up later, but seriously this should be the problem of exchanges anymore, so better not to stress yourself about this one.

Maybe someone who asks this question should be avoiding getting into crypto right away? I would highly suggest to advice OP to stay away from crypto until he learns more about it. We promote learning how to trade, whereas we are telling a person where money in the trading comes from, in TRADING. With maybe like a year worth of hardcore studying, even OP could become a great trader in crypto, you could start earlier but it takes time to be great.

However, that is not right now, anyone who asks such a simple question should stop everything and start learning how trading works and when to buy and when to sell type of things in very in depth details before they start.

It is quite simply that the exchange acts as the intermediary, you deposit money in the exchange to buy bitcoin and someone else deposits bitcoin in the same exchange to sell it, you place a buy order at a certain price and if someone else places an order to sell at the same price then the transaction is done, you get the bitcoin and the other person gets fiat and the exchange gets a fee from both parties in exchange for securing and guaranteeing the deal, after which you can withdraw the bitcoin and the other person can withdraw the fiat.

Though all the above answers are true and up to the mark, I would like to add up that today’s exchanges have evolved a lot and now they have started to have own back up deposits by means of “holding” the coins and giving our APY% to the users for this staking or hodling activity. Though this might be one of the ways to earn money for us but this is actual forms the liquidity pool for the Exchangers so that they can stabilise the exchanger, it’s earning and pool requirements.

It’s really big stuff that goes around it so in modern exchanger it’s more than just peer to peer exchange!

I deposit Bitcoin to an exchange and you are requesting to buy bitcoin from exchange so its like a marketplace to sell our assets and charge fee for every completed trade.

No exchange is making bitcoin they simply created an interface for people to create trade orders and when one matches with others then trade is done.

Participants of trading on a centralized exchange trade in numbers that they see on monitors, since the cryptocurrency is stored on the wallets of the exchange, to which traders do not have access. To ensure security, exchanges must store cryptocurrency on cold wallets, leaving a small portion on hot wallets to ensure uninterrupted withdrawal of funds from the exchange.

Yea, that’s right. It is clear that the OP doesn’t really know much about how cryptocurrency trading works, or even how the exchanges that facilitates the trade works. It would be good for him to go for a serious study to learn everything about cryptocurrency trading , because if he should go into trading and investment without having the required knowledge, then it is clear that he is just going to end up losing his money. But, it is not bad that he asks this question, as asking question is also part of learning.

If there is something that he doesn’t really understand, then it is good that he asked questions so that those who knows it would explain to him better. I have seen so many comments here and they all explained and answered this question in different ways, so I believe that no matter what, he must have gotten an answer that is very satisfying to him.

It’s an open market. When you buy on an exchange you don’t get it from Binance but you get it from someone else who is selling while you are buying and your orders are matched.

When you make a market order, most likely you are not trading with a human but basically some market maker. Most maker trades are market makers and bots.

However those market makers got those BTC from someone else who sold it to them on the market. And the cycle repeats over and over again.

The basic concept of an exchange is to bring together people who wants to sell and buy cryptocurrency. You can take a decentralized exchange as an example: when you create an account on a decentralized exchange and you want to sell your Bitcoin, the exchange pairs you with another trader who wants to buy Bitcoin, and that is how the exchange happens. So, while you are looking to sell your bitcoins, there are also so many other people out there who wants to buy it from you.


Then as for centralized exchanges such as coinbase.com and binance.com as you have mentioned, what these exchanges do is also the same thing, but what makes it different now is that these exchanges are centralized and they try to make it safe for traders by handling these transactions themselves. Which means that your sell goes to the exchange itself and not like the decentralized exchanges where it goes directly to the buyer, so this way it is much safer. I believe that answers your question.