[noob alert] How Does Mt.Gox Work?

[JMAHH]

- Tried searching for this in the forum but couldn't really find a good overview.

I want to know what Mt.Gox does with your money after you place an order, i.e. how do they order Bitcoins? From where? On what kind of code is the system based? Etc.

Links are welcome.

Thanks!

J. 

[JoelKatz]

The same way you deposit dollars with them and use it to buy Bitcoins which you then withdraw, other people deposit Bitcoins with them and sell it for dollars which they then withdraw. It's basically just that simple.

When you buy Bitcoins, Gox transfers some of your dollars to the account of whoever was selling Bitcoins for the lowest price at that time. (Or whoever comes along later and offers to sell at your buy price.) When they withdraw dollars, Gox sends them a check (or wires them money or whatever).

They strictly act as a middleman.

[mazi]

I want to know what Mt.Gox does with your money after you place an order, i.e. how do they order Bitcoins? From where?

MtGox is an exchange. This means you're not buying bitcoins from them but from other people just like you that have a MtGox account and want to sell bitcoins for USD.

When you place an order (a bid really), your USD will be exchanged for someone else's BTC -- provided that there is some user of MtGox that is willing to exchange at the price you bid.

[JMAHH]

Lol, completely overthought this one. Thanks guys.

I can't help but wonder about the very beginning though. Just when Mt.Gox started, there must have been much more demand than supply no? How did they cope with that? Did they buy coins themselves?

[JoelKatz]

Lol, completely overthought this one. Thanks guys.

I can't help but wonder about the very beginning though. Just when Mt.Gox started, there must have been much more demand than supply no? How did they cope with that? Did they buy coins themselves?

If there's more demand than supply, the price goes up until they match.

[JMAHH]

Lol, completely overthought this one. Thanks guys.

I can't help but wonder about the very beginning though. Just when Mt.Gox started, there must have been much more demand than supply no? How did they cope with that? Did they buy coins themselves?

If there's more demand than supply, the price goes up until they match.

...Making it extremely unprofitable to start a new exchange, since it will be completely outcompeted in terms of price?

[davout]

They strictly act as a middleman.

Not really, they act as a Payment Services Provider (an almost-bank), they keep your fiat money in a nominative account, you can use them to transfer money around without ever touching the Bitcoin side of things.

[TTBit]

Lol, completely overthought this one. Thanks guys.

I can't help but wonder about the very beginning though. Just when Mt.Gox started, there must have been much more demand than supply no? How did they cope with that? Did they buy coins themselves?

There were 10's of thousands under 7 cents each. Price would rally to 8 cents, back to 6.5 cents. The few people mining back then were piling them up, why not take $700 and sell 10,000 of "nothing".

[JoelKatz]

...Making it extremely unprofitable to start a new exchange, since it will be completely outcompeted in terms of price?

If the price is high, that will encourage people to sell their Bitcoins there, bringing the price back down. If the price is low, that will encourage people to buy Bitcoins there, bringing the price back up.

If Bitcoins are selling for $11 at Gox and nobody is selling at some new exchange, I can list my coins for $15 at that exchange if I want, but nobody will buy. If I want to sell my coins (and if I didn't, why would I bother listing them), I'll have to at least roughly match the price at other exchanges.

Interestingly, price offsets between exchanges are a good measure of the health of exchanges. For example, say there are two roughly comparable exchanges, A and B. Their prices will track pretty well as arbitragers balance it out. But say exchange A has some kind of problem and isn't making payouts as quickly and reliably as B. The price at exchange A will increase as people are willing to sell coins for less at B just because they can get their money out more easily.