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I understand the basic cases of how longing/shorting works and how two parties with opposing price predictions can make a derivative contract to settle in cash when the price of an asset goes up or down.

But looking at the cryptocurrency exchanges that offer leveraged trading like Bitmex I wonder how is it done when there's an unequal number of parties?

Let's say 10 users want to bet the asset price will go up, and only 2 users want to bet it will go down, and they all bet on equal amounts.

Where will the counterparties for the unmatched 8 users come from?

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  • Can you describe more clearly how this "bet" is placed? By describing the process more clearly either you'll figure out the answer to your question, or you'll ask a more clear question about the mechanism that you don't understand. Apr 9, 2020 at 18:07
  • Actually I'm a noob and have never even tried to play with leverage. I was assuming I can just say "Here I'm depositing 100 coins at 5x leverage betting the price will go up and I'll pay the standard fee of 0.1% to the exchange", and then someone else would need to bet with the same amount in the opposite direction for it to work. However based on @nanoman's answer it seems there's a spot market with buy/sell orders for bets just like there are spot markets for regular assets. Apr 19, 2020 at 11:08

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Traders generally don't just want to make a long or short bet; they want to make the bet at a specific price. A trade happens when a buyer and seller agree on a price. At any given time, there are offers to buy and sell at various prices (known as the order book). The lower the price, the more people are willing to buy (seeing it as undervalued), and the higher the price, the more people are willing to sell (seeing it as overvalued). Thus, the market price is determined by the matching of buy and sell orders.

This describes limit orders, which have a price attached. There can also be market orders, which simply say "get me long or short at the best currently available price" (this seems more like what you're picturing). An exchange cannot function on market orders alone because there would be nothing to determine the price. But given a "background" of limit orders, 10 market buy orders would be matched with the lowest limit sell orders covering 10 contracts, while 2 market sell orders would be matched with the highest limit buy orders covering 2 contracts. Market orders are not matched with each other.

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