This is a question I get asked a lot: When you buy crypto where does the money go? For those who are just getting into the crypto industry, learning the ropes can be difficult. With thousands of different cryptos on each exchange, things can get pretty overwhelming. When you buy stocks, it is easy to understand where the money goes. There is a tangible company you are investing in. But with cryptos, things are not always as clear.
So where does the money go when you invest in crypto? Well, crypto exchanges operate a lot like stock brokerages. You are buying crypto from the seller of that crypto. So your money flows through the exchange into the wallet of the seller, minus any transaction fees.
Like with stocks, all of the cryptos going back and forth are just on paper. But with crypto, the only way to say you own it is to take it out of the brokerage and store it in a private wallet. It might just be a lot of computer code, but there is a method to the madness!
When You Buy Crypto Where Does the Money Go?
The whole point of an exchange is to facilitate transactions between buyers and sellers. The exchange itself acts as a middleman and skims off a small fee from every trade. Other than that, all of the cash in a crypto transaction will go to the seller of the crypto. Overall, it is a very simple system, even if the assets being traded can seem complicated.
This applies to any cryptos that are being traded. Anything from Bitcoin to Shiba Inu Token. If the crypto is being traded on the exchange, the money you deposit will go to the seller. And if you are selling the cryptos, the money will come from a buyer.
Related Financial Geek Article: When You Buy Bitcoin – Where Exactly Does the Money Go?
Does Crypto Turn Into Real Money?
It’s an interesting question. Everything in the exchange, whether it is crypto or fiat currency, is just there on paper. Until you withdraw fiat currency from the exchange, the value is there in principle. It really is just all numbers on the screen until you make that withdrawal.
But to answer the question, yes, you can turn crypto into real money. Cryptocurrencies are still assets, like stocks, ETFs, or bonds. They all trade in real markets that are dictated mostly by the laws of supply and demand. This gives these assets a value and no matter how much you might think cryptos will replace fiat currency, that value is always assigned a dollar value.
Since the crypto markets trade all over the world, you can turn crypto into hundreds of different currencies. From the Yen to Euros to the US Dollars, as long as you are in a country that has legal crypto trading, they can be converted into real money.
Do I Actually Own My Crypto?
This is one of the more controversial topics in the crypto world. With stocks, when you buy shares you do own them. You can even own physical shares if you really wanted to. But cryptos are completely digital assets. There is no way to hold them in your hand or store them in a safety deposit box.
Well, there is one way: cold storage. Have you heard of the phrase: “Not your keys, not your coins”? This refers to holding your cryptos on a centralized exchange like Coinbase or Binance. Even though you deposit real money and buy cryptos with that money, the only way to actually own them in your possession is to take them off of the exchange.
But what about the money you used to buy that crypto? That has already been sent to the seller. The cryptos you hold in your account are similar to IOUs from the exchange. You have to just hope that the exchange has enough to cover itself if something catastrophic happens. This is why many crypto investors prefer not to keep their cryptos on centralized exchanges.
For My Canadian Readers: 23 Best Crypto Exchanges in Canada
When You Buy Crypto Who Do You Buy it From?
Typically you are buying crypto from another user on the exchange that is selling their crypto. When you buy it with real money, the funds are transferred to the seller in exchange for the crypto tokens. It is a very similar process to stocks.
There really isn’t any way of knowing who you are actually buying it from. You could track crypto addresses as every transaction is recorded on the digital ledger called the blockchain. But even if you do find the crypto address that sold it to you, it would be difficult to determine who it belonged to.
Occasionally you can buy crypto from other sources. Sometimes you can buy it directly from an ICO or Initial Coin Offering. This might mean you are buying it from the company or project that is introducing those coins to the market. But chances are you are just buying it from another investor who bought into the project much earlier than you did.
The Bottom Line: When You Buy Crypto Where Does the Money Go?
I hope this explanation made sense to you. The crypto industry can be a complicated one to follow and is even more difficult to learn. Learning about how crypto exchanges work is the best way to get your foot in the door. One of the first things you will learn is that the cryptos you own on a centralized exchange do not belong to you until you take them offline into your own private wallet. Remember, not your keys, not your coins!
Thanks for coming by today and giving this a read!