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Author Topic: How do the exchanges work?  (Read 828 times)
shamntalk (OP)
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February 24, 2013, 09:19:34 PM
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Thank you guys (and gals!) for the help! Here's my first newbie question.

How do the exchanges work?
I understand the way bitcoin operates, but I don't see how exchanges are able to convert $ or pounds to bitcoins.
Can someone please explain their operations?

Thank you!
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The Bitcoin network protocol was designed to be extremely flexible. It can be used to create timed transactions, escrow transactions, multi-signature transactions, etc. The current features of the client only hint at what will be possible in the future.
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JoelKatz
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February 24, 2013, 09:22:37 PM
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Some people want to sell Bitcoins for dollars or other fiat currencies. Some people want to buy Bitcoins for dollars or other fiat currencies. Exchanges bring buyers and sellers together.

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February 24, 2013, 09:25:54 PM
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It's easy, you send dollars there, someone sent bitcoins there and want to sell them, and you buy. The exchange is a platform to do that and it is safe

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February 24, 2013, 09:26:55 PM
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When you sell a Bitcoin on an exchange, nothing gets converted. 1 Bitcoin is withdrawn from your Bitcoin balance and the value of it is put on your currency account which can be $, £ or whatever.

When you want to cash out,, the exchange withdraw the amount you want to withdraw from their own real money accounts.
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February 24, 2013, 09:33:03 PM
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Thanks! So, if I wanted to be an exchange, all I'd need is an account at a bank, load it with GBP (I'm in the UK) and then simply ask people to wire me money over Pingit or whatever, then when I receive the transaction, send them some bitcoins that I've purchased through say, mtgox?

Do you guys know how companies like blockchain manage to convert to USD, GBP, EURO, etc? Do they just have multiple companies and register accounts everywhere they can legally?

Cheers!
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February 24, 2013, 09:48:41 PM
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Oh, I misunderstood your question. You want to start an exchange?

Okay, You need a Mt,gox account so you can buy your bitcoins for the lowest fees possible.

You transfeer money to Mt.Gox by wire to your £ account (You choose which currency you trade Bitcoins with).

You have to think about what you do if some guy buys Bitcoins from you and the exchange rate goes up! You have made a contract with him to sell x Bitcoins for Y Pounds, so you have a loss.
You want to be able to transfeer the Bitcoins to him right away when you get his money!

You don't have to keep your Bitcoins on Mt.Gox as it takes longer to transfeer them to your Bitcoin wallet and the to your customers, but you don't want to hold to many Bitcoins in your own wallet either as you might need to sell them if the exchange rate drops!

So usually Bitcoins sold to people in real life are sold at a premium something like 10-20% higher than the going rate.

You need a certain amount of Bitcoins and money to be able to take advantage og market movements and not go bankrupt if the price changes too much!

Good luck

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February 24, 2013, 11:58:56 PM
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Thanks! So, if I wanted to be an exchange, all I'd need is an account at a bank, load it with GBP (I'm in the UK) and then simply ask people to wire me money over Pingit or whatever, then when I receive the transaction, send them some bitcoins that I've purchased through say, mtgox?
You wouldn't really be an exchange in that case because the exchange itself is not supposed to be a party to any actual exchange. I would just caution you that if you plan to do that, you will have to be prepared to deal with fraud. And the higher your rates, the worse your fraud problem will be.

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February 25, 2013, 12:15:12 AM
 #8

Thank you guys (and gals!) for the help! Here's my first newbie question.

How do the exchanges work?
I understand the way bitcoin operates, but I don't see how exchanges are able to convert $ or pounds to bitcoins.
Can someone please explain their operations?

Simple.  They take your bitcoins, they say "abracadabra" and bang, they are turned into dollars, euros or whatever.


More seriously though, they maintain an exchange market.  They have a book where they write down orders from their clients to buy or sell bitcoins, and when two orders match, they execute them.  It's not rocket science, really.
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February 25, 2013, 06:18:30 PM
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Hello chaps - I didn't how does things like MtGox work - more how do people who run things like blockchain wallet (where I can load money from banks, sms etc) actually function? Do they they just buy the coins 'normally' then sell them for a premium (to cover their bank fees)?

I just don't understand, having build several businesses myself, how can someone simply open a business bank account in 10 different countries without facing some really, really hard problems (ie minimum volume)

Thank you.

s
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February 25, 2013, 06:42:40 PM
 #10

The best way I found to understand what an exchange is doing is to look at the order book tables on the bitparking exchanges.  As an example, here's the bitparking Bitcoin (BTC) <-> TerraCoin (TRC) exchange:

https://trcexchange.bitparking.com/main

Here you can see all open orders, the amounts and rates of those orders.  They are divided into two sides: Buy (Bid) and Sell (Ask).  They are sorted by price.  In the third column, you can see recently executed trades, including the amounts and rates.

As noted above, an exchange is not an actual party to any of the trades.  They just let people deposit two (or more) currencies/commodities, and they allow people to place orders, and they track ownership of the deposits, execute trades when the prices match, and provide for withdrawals.  Once you've made a deposit, the exchange takes custodianship of your deposit (so your bitcoins would presumably go into an address that they control, or your fiat currency would presumably go into their bank account), and your "ownership" is tracked only in the exchange database, until withdrawal.

This bid/ask/recent trades data sums up what is going on on any exchange, whether it be Bitcoins, fiat currency, some kind of alternative cryptocoin, or some tangible commodity.

If you take a look at mtgoxlive.com, you can see the exact same type of data in a graph format, updated live, for trades between USD and BTC on the MtGox exchange.

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February 25, 2013, 08:59:43 PM
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what's the fastest wallet I can use to send and receive btc? i juz started and receiving takes 3 or more days???

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February 25, 2013, 09:33:22 PM
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what's the fastest wallet I can use to send and receive btc? i juz started and receiving takes 3 or more days???

The wallets are all the same speed when sending and receiving bitcoin.  If you want transactions to confirm faster, the sender needs to include a transaction fee.  All of the well known and used wallets provide a method for a sender to pay a fee.

No matter which wallet you are using you should see the bitcoin transferred within a few seconds, but they will have 0 confirmations until a miner includes them in a block.

Are you saying that they aren't transferring. or just that they aren't getting any confirmations?
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February 25, 2013, 09:47:55 PM
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what's the fastest wallet I can use to send and receive btc? i juz started and receiving takes 3 or more days???

The wallets are all the same speed when sending and receiving bitcoin.  If you want transactions to confirm faster, the sender needs to include a transaction fee.  All of the well known and used wallets provide a method for a sender to pay a fee.

No matter which wallet you are using you should see the bitcoin transferred within a few seconds, but they will have 0 confirmations until a miner includes them in a block.

Are you saying that they aren't transferring. or just that they aren't getting any confirmations?

yeah not getting confirmations...

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February 25, 2013, 10:32:18 PM
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yeah not getting confirmations...

Most likely low priority transactions:

  • Using coins that haven't aged yet.
  • Transferring extremely small amounts (less than 0.01 BTC).
  • Transactions that have an unusually large number of inputs or outputs resulting in a transaction that requires more than 10,000 bytes.

And not paying enough of a fee for miners to consider it.

Many wallets will warn you if a fee is recommended.  What wallet are you using?
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February 25, 2013, 10:37:12 PM
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yeah not getting confirmations...

Most likely low priority transactions:

  • Using coins that haven't aged yet.
  • Transferring extremely small amounts (less than 0.01 BTC).
  • Transactions that have an unusually large number of inputs or outputs resulting in a transaction that requires more than 10,000 bytes.

And not paying enough of a fee for miners to consider it.

Many wallets will warn you if a fee is recommended.  What wallet are you using?

coinbase

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February 25, 2013, 10:45:53 PM
Last edit: February 26, 2013, 04:19:32 AM by DannyHamilton
 #16

yeah not getting confirmations...
Many wallets will warn you if a fee is recommended.  What wallet are you using?
coinbase

Interesting, I hadn't realized that Coinbase doesn't provide a method for including transaction fees, nor does it recommend them when necessary.  That seems like an oversight on their part.  Hopefully they will fix that in the near future.

Edit: the next post points out that I am mistaken.  Coinbase does pay fees in most cases.  Without further details (such as a transactionID), I can't explain why the transactions are taking several days to confirm.
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February 26, 2013, 02:43:31 AM
 #17

Interesting, I hadn't realized that Coinbase doesn't provide a method for including transaction fees, nor does it recommend them when necessary.  That seems like an oversight on their part.  Hopefully they will fix that in the near future.

Here's what they say about it:

http://support.coinbase.com/customer/portal/articles/815435-does-coinbase-pay-bitcoin-miner-fees-

Quote from: Coinbase
Yes, Coinbase pays miner fees (typically between 0.0005 and 0.01 BTC) on your behalf to ensure transactions propagate throughout the bitcoin network quickly.  For amounts less than 0.01 BTC, Coinbase does not pay fees but gives you the option of including your own fee if you would like.

They did have a big issue two weeks ago where a bug on their part resulted in spending unconfirmed transactions.  I think it went hundreds of levels deep.  They eventually paid a miner to mine the initial broken transaction, and fixed the bug to prevent it recurring.

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February 26, 2013, 03:13:27 AM
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Look at the new Ripple infrastructure.  You would want to become a Nexus.

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February 26, 2013, 06:35:42 AM
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what's the fastest wallet I can use to send and receive btc? i juz started and receiving takes 3 or more days???
You should try Blockchain.info's My Wallet. They allow you to spend unconfirmed outputs, which means that you can spend coins as soon as you receive them.

Most services do require deposits to confirm a number of times. Generally, one confirm is 10 minutes, but this can vary!

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