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Ask HN: How can Coinbase make good on deposits/withdrawals?
56 points by ethagknight on Dec 7, 2017 | hide | past | web | favorite | 37 comments
If 10 people have 10 bitcoins that they bought from coinbase for $10, and now the ‘market’ says 1 BTC = $10,000, and all 10 people want to cash out, how does coinbase make disbursal? Obviously there are new people coming in and buying BTC at a higher price, but due to the surge, can Coinbase really honor all deposits?

To get your fiat cash out, you'd have to sell that 1 BTC for $10,000. Someone needs to be on the other side of that trade buying it. You get their $10K, and they get your 1 BTC (and coinbase takes a small percentage for facilitating the transaction).

If nobody wants to buy your BTC at $10K, you don't get "your" money out, until coinbase can find a buyer to match with your sale.

In your example, all 10 of you start lowering your asking price, and "the market" goes down until you make a sale.

Coinbase may provide some liquidity, buying your BTC at "market price" with their cash reserves, but only if they think they can resell it at a higher price.

The risk they take on in doing that, and the liquidity they provide, is the nominal economic reason you are paying their fees.

I think this is also a basic concept of the stock market that many people don't understand as well.

In the stock market, there exists counterparty risk mitigation; in the event your counterparty is insolvent at the time clearing/settlement occurs, your trade will be made whole by a clearing/settlement corp.

No such guarantee exists with cryptocurrencies.

What? Coinbase and other exchanges go a step further than that, and require the counterparty to have deposited 100% of what they will deliver to you up front. So you will be made whole unless the exchange itself steals your money or gets hacked.

Who is backing Coinbase in the event of insolvency due to a clearing or settlement anomaly?

If you hit the Depth Chart button on this graph [1] you can see a visual representation of all the offers to buy and sell. Where they meet in the middle is where people have successful transactions and that is the current "price" of bitcoin.

[1]: https://www.gdax.com/trade/BTC-USD

I find this hard to believe that coinbase is doing this with no regulation. I don't know if you all saw what happened to Full Tilt Poker, look it up. I'm afraid something like that could happen to coinbase. FTP got an influx of deposits and used that to fund players for when they withdrew. FTP was using the fund pool for other reasons and pocketing some of it, while still being able to payout players. The day came the gov't shut down the site but the company did not have the funds to pay back the players.

Now this might be different because bitcoin is what it is this is, while you control your wallet and this occurs more like a stock market rather than full tilt poker. Still I'm somewhat skeptical because coinbase could be doing something more complex to where they take on risk. Just my opinion, have to research more but this is a thread I was looking for.

If you look right now at both Bitfinex and GDAX/Coinbase, there is a $1000 discrepancy in price between the two. I know that these are separate markets, but they both represent bitcoin, and I wish I knew how to arbitrage between the two if a Bitcoin is a Bitcoin the world over.. My guess is that is exactly what Coinbase is doing: showing its exchange price, but executing sale orders on different exchanges.

This is wrong. Someone could buy that btc using litecoin they bought on another exchange. Coinbase maintains a promise to cash out user's holdings.

naive question: does coinbase really make markets in BTC??

What's the question? I assume you're asking if Coinbase actually buys BTC when you ask them to? Coinbase isn't publicly audited as far as I know so we don't really know. A related question would be... what fraction of Coinbase customers actually send or receive bitcoin, and what fraction of Coinbase customers simply buy and hold bitcoin that never goes anywhere. With this question answered, we would know how much Coinbase needs to actually execute on trades, and how much Coinbase could simply take the customers money, claim BTC ownership, and then not actually transact BTC.

I assume exchanges have some way of signalling options to each other but I don't know what that is.

i was wondering whether coinbase itself actually buys or sells bitcoin, or if they just pass along orders to exchanges or market makers that execute the trade, and then keep a record of the transactions that are executed.

if coinbase fills orders by buying and selling bitcoin on its own account, then that is a very different business model from what i assumed they did

Maybe Coinbase themselves does.

Coinbase has market makers though who pay 0% transaction fees. So the makers may take the other side of transactions.

From my understanding (which may be entirely wrong but it's not like that stops people on the internet from writing things as if they're correct in all knowledge), Coinbase itself does not give you the $10,000 when they sell. Rather, they are merely a pretty front end for a standard exchange; probably GDAX, the one they also own and operate. So when you go to their site and tell them to give you $10,000 for your 1 BTC, what they actually do is go to their exchange and create a sell order on your behalf. When that order is fulfilled by someone else buying 1 BTC for $10,000, Coinbase takes a cut and then puts the rest into your account.

The confusion results from the conception that the market (any market) has a single price. It doesn't. When exchanges (stock exchanges, currency exchanges, commodity exchanges) execute trades, they do so with something called an "order book". You can think of it more like an available histogram of potential trade prices. The transactions tend to settle at the nexus of where buyers meet sellers, but if there's only $1 worth of BTC available at the "1 BTC=$10000" rate, then if you want all of your $10 transaction to execute now you will have to pay more. Alternatively you can leave your order at the "1:10000" rate and hope that someone comes and picks it up.

When you buy or sell on an exchange, you're not transacting against the exchange, but against a counterparty, via the exchange; someone like you, but making the opposite transaction. If you sell a Bitcoin for $10k, then someone else brought $10k to the exchange and offered to exchange it for a Bitcoin.

The only way an exchange wouldn't be able to honour deposits is if they lost them, or because of fraud. A surge in price shouldn't affect the solvency of the exchange.

Coinbase's exchange GDAX matches sellers with buyers. The buyers bring the cash to the party, not Coinbase.

Coinbase is an automated mechanism that matches buyer to seller, although it does you the extra favor of storing your private keys for you (something a lot of people don't trust, probably for good reason).

I don't know what external hooks there are that add liquidity, perhaps some of the other exchanges including the one it owns. Otherwise it would feel more like an E-Bay auction than a fast-paced market.

If everyone withdraws at once, you'll have 10 sell orders at the same time that need to be filled 'someplace' on the other side.

If no one wants it anymore, the asking price will have to get lower and lower. Coinbase shows you some sort of average price, but you can see a list of the orders put in if you log on an actual exchange like Bittrex. When I saw the sell and buy orders sitting in a queue waiting to be filled, some low-ball, etc., things starting to click for me.

The above is what I've gleaned from observation and reading. I could be wrong - and if there's one thing about this crypto bubble craze, is it's motivated me to learn about markets/exchanges, money, cryptography, and more. And to think about this things more abstractly and even critically.

Replace BTC for EUR, CHF, GBP or any other currency (or even a physical good, like an ounce of gold) and see what changes. The fact that BTC is a cryptocurrency doesn't change anything in how trades happen. And the fact that 1BTC used to be 10USD but now is 10k USD is no different than 1USD being 0.95EUR one year ago and 0.85EUR today. The difference is larger, yes, but that doesn't matter.

While you may be right, the difference to me, and the main reason why I originally asked the question, is that USD has the full force and guarantee of the us government. AAPL has a discounted future cashflow. Gold has industrial, sentimental and government consensus value. BTC has none of that, just a consensus of value based on active trades, which (side note) may well be the best thing about BTC.

I recently sold my little stash of BTC because I just realized that I don't understand at all what is happening regarding BTC, why it is happening, and whether it will continue to happen. All this BTC has no where to go but into other prospective wallets. I also had a sudden concern that there is no reason to trust Coinbase, let alone the market or BTC in general, and why would I leave money with people I have no reason to trust and have no means of penalizing should they fail to honor their terms with me.

The reality, as others point out, is that Coinbase has people dumping real money into their system to get in on BTC, and thats what Coinbase use to pay my withdrawal, which is as simple as I could have imagined it. I just dont know why.

I'm with you ethagknight. Look at my comment below. I think it's a different ballgame at these prices, counting even more on coinbase that they are doing the rational things.

the structure of the exchanges and the market make a huge difference in how trades happen. one very real example of this is happening now: many people cant make BTC trades happen, while "uptime" for the other markets you mention is virtually 100%

so the fact that BTC is crypto doesnt change anything about how trades happen, but the massive differences in market structure between crypto and established markets makes a huge difference

edit: and the fact that the difference is larger does matter. volatility is one of the core inputs of derivatives pricing, and for a derivatives market to exist, volatility must be estimable. having a derivatives market has major influence on prices and liquidity of the market for the original security. for BTC to really go mainstream, markets need to evolve

I think people forget - Coinbase makes profit in BTC too.

The issue of disbursement might have happened if they were completely USD or fiat business and the market ran away from them during conversion. But btc fees has them covered.

Ultimately you don't sell your bitcoins to Coinbase. You sell them to the people who are buying bitcoins on Coinbase. The point where buyers and sellers meet is the current price on Coinbase.

Many thanks to all these responses. I know this question has been hashed out ad nauseam on HN but given the dramatic rise over the last week, I needed a reality check that im not missing something. I find this discussion interesting.

Screenshot of Coinbase quote before the site crashed this morning before price "fell" "back" to $16,000. https://imgur.com/a/FClNZ

That's why Coinbase runs GDAX that caters to large & frequent traders, giving huge discounts on fees to the people who provide that liquidity for them. They also run an OTC desk to shuffle funds around in larger quantities both for themselves and their largest customers.

Coinbase is just a broker with a bunch of customers. It connects to all the BTC exchanges in order to execute all their orders. They don't own bitcoins.

Coinbase can use (and runs) an exchange to get liquidity. When a user sells their coins, Coinbase goes to an exchange and sells them on, taking a cut.

The way things are moving it seems no one is selling and that's what baffles me. Crypto market is something we have never seen before where people are buying and not selling that is what is driving the price of Bitcoin.

Not true. For each buy that happens, there must be a sale. There are more buyers than sellers right now, not no sellers. Each time the price goes up, that's a sale _that happened_

This is something we've seen many times before. It's not new. It's a classic bubble where demand (buyers) greatly outstrips supply (sellers).

The big question is why. Crypto currencies haven't suddenly gotten more useful. The current rise is fueled by speculation of the ability to resell at a higher price.

I think a large part of the answer is scope. The scope is international, and the scope of average, retail investors and their ability to do this ... well, unprecedented. Next, you have a lot of people with a lot of cash, tens, maybe hundreds of millions of potential people, in China, Korea, Japan, U.S., Europe, and so forth.

That's my hypothesis as to the 'unprecedented' aspect to all of this.

What other bubbles are there that were so lightning-quick, vast in geography and 24/7 operation.

Tulips at least required some sort of hand waving at auctions (presumably) and some transportation at some point after 'settlement'.

This is as fast as a video game connected to your bank account.

Some people definitely are selling, it's not like we're seeing new BTC come from thin air for all these buyers (assuming they're getting BTC on their private wallets instead of an IOU that might not be covered with real BTC)

However, at the moment there's a lot of willingness to buy and little willingness to sell, and that's why the price is rising.

People are selling, otherwise there would be no market.

There can be a market with only buyers or sellers. There is just no execution.

What is "the market"??? It's only people agreeing to trade... so vendor AND buyers!! What makes a "market price"? It's the amount that buyers are willing to give to sellers for something. If there is no buyer (or no sellers ), then there is no "price", because there is no market. Same if buyers and sellers cant agree on the price (vendor ask to much) Coinbase is only a marketplace. So it doesn't have to honor any deposit. It only allows sellers and buyers to trade

Why does this question have so many upvotes?

Remember: you don't have to do your transactions in whole bitcoins.

I, for instance, had .32btc sitting around on Coinbase and decided to sell it when the price broke 10k. That got me about $3k.

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