The information contained in this article not intended to be a substitute for legal or financial advice that can be provided by your own attorney, accountant, and/or financial advisor.
For those who are just starting to get into cryptocurrencies one of the first questions is always: when you buy Bitcoin where does the money go? It makes perfect sense. Since cryptos are digital assets, someone has to be holding the fiat currency we pay in exchange for them. But who is holding all of our money when we buy Bitcoin?
The truth is, whenever we ‘Buy’ Bitcoin, we are buying it from the person or party that is selling it. Just like with stocks, when you buy shares it is from someone who is selling them. The most common way people buy Bitcoin and other cryptos are from a centralized exchange so more often than not, it is the exchange itself that holds the money.
So while investing in Bitcoin and cryptocurrencies has always been about decentralization, it comes as a surprise to many people that the easiest access to the market is through a centralized exchange. These include sites like Coinbase, Binance, and Kraken. Not to worry though, most of these exchanges are holding billions of dollars in fiat currency and cryptocurrencies. Our trades are likely just a drop in the bucket!
Where Does Your Money Go When You Buy Bitcoin?
For most people, it will go directly to the exchange itself. From there, it will be paid out to the previous holder of those Bitcoin, similar to if you were buying stocks or ETFs. It isn’t a particularly complex system compared to the entries on the blockchain for each transaction. If you’re looking to track your Bitcoin transactions, you can absolutely follow them directly at any blockchain tracking site.
The fun part comes when you actually go to withdraw the Bitcoin you just bought. When you buy Bitcoin on an exchange, you own it, but you also don’t own it. Does that make sense? The Bitcoin is in your digital wallet which is under your account, but at any time it can be hacked, or worse, the exchange can go insolvent and you could lose all of your cryptos.
So what does it mean to actually withdraw your cryptos? Like the exchange itself, you can take your Bitcoin offline and into what is called cold storage. This means that it is in a digital wallet that is not connected to the internet and therefore cannot be hacked. This is unique to cryptos and cannot be done with stocks since they are not digital assets. It is the crypto version of keeping your cash underneath your mattress.
When You Sell Bitcoin do you Get Real Money Back?
Absolutely! With the caveat that you are selling Bitcoin that you are holding on the exchange. If you want to sell Bitcoin that you have taken off of the exchange and placed into cold storage, you’ll have to resend it to your wallet that is associated with that exchange. Once you have done that you are free to either sell that Bitcoin back for real money or in exchange for other cryptos.
One way to get both in exchange for your Bitcoin is to sell them for what are called stablecoins. These are cryptos that are pegged to the value of the US Dollar, essentially creating a digital version of the greenback. These have made it much easier to make crypto trades without having to continue to load your wallet with fiat currency.
But if you do want real money back for your cryptos you can certainly do that as well. Most exchanges also have a fiat wallet where you can withdraw funds to a bank account or a third-party account like PayPal. This is the easiest and quickest way to sell your Bitcoin for real money and then be able to use that money outside of the crypto exchange.
What is the Safest Way to Buy Bitcoin?
Honestly, I could go into things like Bitcoin mining and obtaining it in a completely decentralized way. But the easiest and for the most part, safest way to buy Bitcoin is still from a centralized exchange. So while crypto exchanges haven’t had the best reputation as of late, they are still the easiest bridge between cryptos and fiat currencies.
Now, remember, just because a centralized exchange is safe to buy Bitcoin on, it doesn’t mean you should hold it there. I always recommend to investors that are getting into crypto to try and use cold storage, no matter how much they have invested. Even if you are okay with losing a small amount, a cold storage wallet is not a big investment.
Have you ever heard of Mt. Gox? It was the first ever Bitcoin exchange that existed back when it was trading for less than a dollar. Mt. Gox was hacked and people lost millions of Bitcoin. It wasn’t a big deal back then but now, those Bitcoin would be worth tens of millions of dollars. So to summarize: buy Bitcoin on an exchange but do not store it there if you can help it!
The Bottom Line: When you buy Bitcoin Where Does Your Money Go?
I’ve found that a lot of people have a difficult time grasping the concept of cryptocurrencies. Without getting into the details of the blockchain and decentralization, they are essentially digital assets that trade like equities on an exchange.
When you buy Bitcoin, the money you use to pay goes to whoever held that Bitcoin and was selling it. This could be a seller or it could be the exchange you are using! I hope this helped!