The second lesson on arbitrage. What an exchange looks like from the inside: why a purchase on an exchange never touches the blockchain, where your coins actually are, and why transfers within an exchange and between exchanges run at such different speeds.

LESSON 2 · NOTES

What Happens When You Buy Crypto on an Exchange

You bought bitcoin, yet nothing changed on the blockchain. Let’s find out where your coins actually are.

Three takeaways

An exchange is a database. Your balance there is a row in a table, not coins in your hands. The keys to those coins belong to the exchange, not to you.
A trade on an exchange is an edit to two records. The blockchain isn’t involved at all when you buy on an exchange. That’s why the trade is instant and almost free.
The blockchain only comes in on deposits and withdrawals. That’s the source of the whole difference in speed and fees between operations inside an exchange and between exchanges.

1. What an exchange is, technically

An exchange is a database. An ordinary table recording which user holds which asset and how much. You’re one row among millions. When you see “0.0126 BTC” on an exchange, it doesn’t mean you have bitcoin. It means the exchange has recorded that it owes you bitcoin. The private keys to the real coins are held by the exchange, not by you. Hence the well-known saying “not your keys, not your coins.” The point is simple: while an asset sits on an exchange, the exchange controls it. You can request a withdrawal — whether to execute it is the exchange’s call. An important caveat: everything here applies to centralized exchanges (CEX) — Binance, Bybit, OKX and the like. Decentralized exchanges (DEX) work the other way around: the trade happens right on the blockchain, and the keys stay with you. These are two different worlds.

2. What happens at the moment of a trade

You’re buying bitcoin from another user of the same exchange. Before the trade you have 1,000 USDT and they have 0.0126 BTC. After the trade it’s the reverse. Technically, all that happened is the exchange changed two rows in its database. No coins moved anywhere, no transaction was sent to the network. That’s exactly why a trade on an exchange is instant and costs a fraction of a percent.

3. Where the blockchain does come in

At exactly two points.

Deposit. You send coins to the exchange’s address. The network confirms the transaction, the exchange sees it arrive and credits your row in its database.
Withdrawal. The exchange reduces your row and sends a real transaction to the network. This is where you pay the network fee and wait for confirmations.

Everything between those two points is the exchange’s internal ledger.

Inside an exchange — a database. Between exchanges — the blockchain. That’s where the whole difference in speed comes from.

4. Four consequences

Inside an exchange, everything is instant. A thousand trades per second put no load on the network — they’re just records.
Between exchanges, it’s slow. Confirmations, network fees, queues. Anywhere from a minute to an hour, depending on the network and how busy it is.
An exchange can halt withdrawals. It’s a private company with its own rules: account freezes, document requests, suspended withdrawals for a particular coin. The network can’t do that; the exchange can.
Each exchange has its own database. That’s the technical reason prices across venues aren’t linked.

Terms

Internal ledger — The exchange’s own database where user balances are kept. Operations in it never reach the blockchain.
CEX and DEX — A centralized exchange holds assets itself and keeps an internal ledger. A decentralized one settles trades on the blockchain, and the keys stay with the user.
Private key — What proves the right to spend coins on the network. On an exchange, it belongs to the exchange.
Deposit and withdrawal — The two operations where the exchange interacts with the real blockchain.
Confirmation — The inclusion of a transaction in a block. Exchanges usually require several confirmations before crediting funds — hence the wait.
Network fee — The payment to miners or validators for processing a transaction. Not to be confused with the exchange’s trading fee — they’re different things.

Check yourself

Why is a trade on an exchange instant, while a transfer between exchanges takes minutes?
A trade on an exchange is a change to two rows in its own database. A transfer between exchanges needs a real network transaction, and that has to be confirmed.

What does a balance of “0.5 BTC” on an exchange mean, technically?
That the exchange has recorded an obligation to give you 0.5 BTC on request. The coins themselves sit at the exchange’s addresses, and it holds the keys.

Can the Bitcoin network freeze your funds?
No — the network has no such mechanism. An exchange can: it’s a private company operating under its own rules and regulators’ requirements.

Next lesson: the order book — how your order actually gets filled and why any asset always has two prices, not one. Trade breakdowns and what’s happening in the market — on our Telegram channel @arbiq_ai · t.me/arbiq_ai

This material is for educational purposes only and is not investment advice. You make all trading decisions on your own and at your own risk.

A2Lesson 2. What Happens When You Buy Crypto on an Exchange