[googletazer]

You don't understand how trading bitcoin works. Trading is not done on the chain, its the centralized exchanges which keep the books. Its instantaneous, with people who are involved in arbitrage between the exchanges keeping the prices level across all.

[dimillian]

A bubble explosion would inevitably bankrupt the exchange platform first, then you. GDAX/Coinbase will never be able to create money out of thin air if everyone are selling and the BTC is dropping to $5. So even if you sell before everyone, even if you get your money on Coinbase virtually, they'll never honour the wire transfert.

[jfoldager]

Why will a bubble explosion bankrupt an exchange platform? The platform doesn't need to own any bitcoins and can be unaffected by price swings. The platform likely earns bitcoins through fees, but is free to trade them at any time. In principal all the bitcoins in the care of the exchange can be owned (or owed) to the traders.

[tarnacious_]

I understand bitcoin are traded like this but it doesn't address this issue the parent raises. Also if you are trading through an exchange like this you are likely exposed to even greater risks.

If you buy some bitcoin from an exchange and you don't get the bitcoin in an address you control, you are effectively buying an IOU for the bitcoin. The value of the IOU depends not only on the value of bitcoin but also on the exchanges willingness/ability to repay it.

If the exchange doesn't own a similar amount of bitcoins as they have sold IOUs, at the current market value they couldn't possibly repay the IOUs they issued a month ago. If a significant amount of people they have issued IOUs want to redeem them, then they will surely need to sell some bitcoins to repay the IOUs they have issued.

By using a futures market they could limit their exposure price changes when buying or selling coins they don't have, but these markets are quite young and it's certainly not clear how much risk these exchanges are exposing themselves to.

As you apparently understand this better than we do, what do you think will happen on these exchanges if the value of bitcoin starts falling rapidly?

[craigc]

That assumes you have your coins on an exchange. If you have them in a wallet you would have to send them to the exchange before selling, and that process could take hours or days.

[jo909]

But only if you already have your bitcoins on the exchange. If you keep them in your own wallet you need a blockchain transaction to be able to trade them at all.

That will effectively put a limit on the amount of bitcoin that is able to be sold quickly in a crash.

[jandrese]

Historically keeping your coins on an exchange is the most effective way to have them stolen. I would hope most bitcoin users would have learned their lesson by now.