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.