Understanding exchange risk

[lovethepirk]

I don't understand why an exchange is a risk.  Let me explain my confusion in a real world example and then slap me with a dead fish and save my confusion please.

1) So, I want to buy my first bitcoins. 
2) I find an exchange I like and wire them 1,000USD and let's say I get 2 bitcoins in return.
3) From my reading, I get a private key that I write down and stick in my favorite hiding place.
4) The exchange I bought the bitcoins from goes bankrupt and no longer exists.
5) I still have my bitcoin b/c I have the private key identifying my coin from all others

The only risk I see is during the 10 minutes or so of me wiring money and me getting my bitcoin key.  After I get the key, I thought I am basically my own bank and the only protector in the world of that bitcoin.

Where am I off base?

Thanks.

[Ritual]

I'm no expert, so this could be inaccurate, but I think you'd have one of two scenarios:

1) After you bought your bitcoins, you transfer them out to your own wallet. These are completely safe even if the exchange goes wallop.

2) You store them on the exchange, in which case you are screwed.

So assuming that you are talking about immediately withdrawing to your own wallet after you've purchased, then yes, you are safe

Rit.

[shorena]

I don't understand why an exchange is a risk.  Let me explain my confusion in a real world example and then slap me with a dead fish and save my confusion please.

1) So, I want to buy my first bitcoins. 
2) I find an exchange I like and wire them 1,000USD and let's say I get 2 bitcoins in return.
3) From my reading, I get a private key that I write down and stick in my favorite hiding place.
4) The exchange I bought the bitcoins from goes bankrupt and no longer exists.
5) I still have my bitcoin b/c I have the private key identifying my coin from all others

The only risk I see is during the 10 minutes or so of me wiring money and me getting my bitcoin key.  After I get the key, I thought I am basically my own bank and the only protector in the world of that bitcoin.

Where am I off base?

Thanks.

#1-#2 great, welcome
#3 nope, you need to create a wallet first which has a private key, which can potientially be written down. See paperwallet https://en.bitcoin.it/wiki/Paper_wallet

Usually you have a normal wallet (a programm) where you can send and receive your bitcoins.

#4 you can care less if you allready got your BTC from them
#5 yes
#6 10 minutes? You wish!
#6.1 authenticate to the exchange (took me 1-2 weeks, I had to get some papers, so it might go faster if you have everything the exchange requires.)
#6.2 sending the money will take at least 2-3 days, if you wire internationally even longer
#6.3 receiving your btc will only take 1 to a few hours, so thats the fastest part
#6.4 now only you controll those 2 (probably more) BTC

I'm no expert, so this could be inaccurate, but I think you'd have one of two scenarios:

1) After you bought your bitcoins, you transfer them out to your own wallet. These are completely safe even if the exchange goes wallop.

2) You store them on the exchange, in which case you are screwed.

So assuming that you are talking about immediately withdrawing to your own wallet after you've purchased, then yes, you are safe

Rit.

#1 Your own wallet is only as safe as your own PC, so for most people not very safe. But yes, the exchange can go bankrupt if you have your BTC and you can care less.... well maybe they sell your private data or something, but thats about it

#2 only do that if you want to trade on a regular basis.

[lovethepirk]

1) So as long as you remove your bitcoins from the exchange immediately then you are still in possession of your bitcons, correct?
2) To get USD in return for bitcoins I assume you reverse the process and send your bitcoins to an exchange?
3) Is there another purpose for these exchanges, for instance do some people store their bitcoins there for weeks/months? 


I'm confused what is the benefit of storing your bitcoins at an exchange?  I would just store my private key in my safe at home and a few other hiding places outside of my digital harddrives.

[greyhawk]

1) So as long as you remove your bitcoins from the exchange immediately then you are still in possession of your bitcons, correct?

Tell me, Mr. Anderson, how are you going to remove your bitcoins from the exchange if you're unable to withdraw?

[qznc]

2) I find an exchange I like and wire them 1,000USD and let's say I get 2 bitcoins in return.
3) From my reading, I get a private key that I write down and stick in my favorite hiding place.

You missed some steps in between there. You do not get a private key from the exchange.

2.a) I find an exchange I like and wire them 1,000USD and let's say I get 2 bitcoins in return.
2.b) Download and run your own wallet.
2.c) Transfer the 2 bitcoins from exchange to your wallet address.
3) export private key from your wallet and stick it in my favorite hiding place.

(you can also stick it into your favorite hiding place, but I would prefer mine )

[Ritual]

1) So as long as you remove your bitcoins from the exchange immediately then you are still in possession of your bitcons, correct?
2) To get USD in return for bitcoins I assume you reverse the process and send your bitcoins to an exchange?
3) Is there another purpose for these exchanges, for instance do some people store their bitcoins there for weeks/months? 


I'm confused what is the benefit of storing your bitcoins at an exchange?  I would just store my private key in my safe at home and a few other hiding places outside of my digital harddrives.

1) Yes. If you remove them from the exchange to your own wallet, then the exchange can get hit by a meteor and it won't affect you.

2) You can certainly do it this way, yes. But there are also other options, such as face to face trade via sites like localbitcoins.com

3) Trading between crypto currencies is the major function of an exchange. And you would store the coins at the exchange for as long as you wished to trade. After you;ve made your profits or your losses, you can always just transfer out to your wallet again. The disadvantage of keeping coins on exchanges longterm is that you are then exposed to the same risks as the exchange - i.e. natural disaster, theft, scam, insolvency, fund seizure etc etc. See the ongoing tale of MtGox for an example.

Hope that helps,

Rit.

[lovethepirk]

I understand better now....

When you get a wallet do you get an address(for instance what I see in greyhawks signature?)?

Are you given one private key no matter how many bitcoins you collect or do you get a private key for each transaction?

[Ritual]

It's one private key per Bitcoin address.

[neot]

1) So as long as you remove your bitcoins from the exchange immediately then you are still in possession of your bitcons, correct?
2) To get USD in return for bitcoins I assume you reverse the process and send your bitcoins to an exchange?
3) Is there another purpose for these exchanges, for instance do some people store their bitcoins there for weeks/months? 


I'm confused what is the benefit of storing your bitcoins at an exchange?  I would just store my private key in my safe at home and a few other hiding places outside of my digital harddrives.

1) Yes. If you remove them from the exchange to your own wallet, then the exchange can get hit by a meteor and it won't affect you.

2) You can certainly do it this way, yes. But there are also other options, such as face to face trade via sites like localbitcoins.com

3) Trading between crypto currencies is the major function of an exchange. And you would store the coins at the exchange for as long as you wished to trade. After you;ve made your profits or your losses, you can always just transfer out to your wallet again. The disadvantage of keeping coins on exchanges longterm is that you are then exposed to the same risks as the exchange - i.e. natural disaster, theft, scam, insolvency, fund seizure etc etc. See the ongoing tale of MtGox for an example.

Hope that helps,

Rit.

Agree.

[shorena]

1) So as long as you remove your bitcoins from the exchange immediately then you are still in possession of your bitcons, correct?

Tell me, Mr. Anderson, how are you going to remove your bitcoins from the exchange if you're unable to withdraw?

Gotta love Mt.Gox for these jokes.

[Kiki112]

if you withdraw them right away there is no risk but if you keep them at the exchange and if it goes down your coins are screwed

so kids, always withdraw your bitcoin right away

[lovethepirk]

Thanks for the discussion, it cleared up many of my questions. 

I'd like to sign up for a wallet and possibly entertain accepting bitcoins for a small business I started.

If you know of any pitfalls that are common and hard to escape thru hours of reading I welcome the discussion.

Thanks,

ltp