Interesting. I'm doing this first time and found this really suspicious. Basically it means exchanges are not trading actual coins and simply holding my cash. They can even use it to invest other stuff and generate additional income. Even more suspicious is they charge fees which appear to be transaction fees. Won't that be fraud? Imagine you buy a stock and the exchange doesn't actually buy it, and charge you trading fee. And if the stock decline and you sell, they make profits of the difference and simply return you the rest. What a good business! – ycshao – 2017-08-01T05:42:45.977

The fees they charge are for facilitating the trade. And yes, you are giving them money that they can basically do whatever they want with. It's like banks; your account is essentially a promise that they will send that amount of coins to wherever you request it. When you trade, you are actually trading with the exchange itself or with other people on the exchange. They are just updating internal accounts to credit and debit the correct amounts. They aren't taking your money and going elsewhere to buy Bitcoin, you are actually buying Bitcoin from them. – Andrew Chow – 2017-08-01T05:46:52.620

I don't think comparing to bank is a good analogy. The nature of it is more like stock exchange, where people trade between USD and stock stock for example. On bitcoin exchange people trade between USD and bitcoin. In a stock exchange, I can request physical form of my trade by requesting the exchange to show me the transaction actually happens. Otherwise I can see it easily become a Ponzi scheme. – ycshao – 2017-08-01T06:01:25.917