As Bitcoin’s popularity continues to grow, more and more people are turning to centralized exchanges to purchase this digital currency. Still, it’s important to understand that when BTC tokens are held on centralized exchanges, the owner never knows for sure if he’s actually getting real Bitcoin or “paper Bitcoin.”
Paper Bitcoin refers to an “I owe you” Bitcoin, which means that the exchange owes the user a certain amount of the digital currency. To ensure that the purchased Bitcoin is genuine, investors must withdraw it to a self-storage wallet or sell it for another asset or commodity. This is because most exchanges will not create a separate wallet for users to save on transaction fees, instead these companies display Bitcoin balances as a number next to the username in a spreadsheet.
Neither your keys nor your coins
The phrase “neither your keys, nor your coins” is a popular saying in the crypto community that emphasizes the importance of owning the private keys of the cryptocurrencies themselves. It means that if an investor does not have control over the private keys associated with his cryptocurrency, he does not actually own his coins. On the other hand, if an investor has control over his private keys, he has full ownership and control over his cryptocurrency and can transact with it as he wishes.
Crypto exchanges tend to keep their BTC in wallets where they own the private keys and store them securely. If they were to transfer small amounts of BTC to users’ wallets every time merchants buy and sell within the ecosystem, exchanges would incur significant transaction fees.
Most major exchanges do not provide proof of customer deposits and while some small exchanges do, users should still rely on these reports to ensure that the exchange has enough BTC to support customer balances.
Withdrawing BTC from a centralized exchange to a non-custodial or hardware wallet is the best way to ensure users receive real BTC, reducing the amount of paper Bitcoin in circulation. It’s worth noting that despite Bitcoin’s 10-minute block time, exchanges can instantly transfer BTC to user accounts, as they only need to update the number next to the user’s name in their spreadsheet.
One of Bitcoin’s key selling points is its limited supply of 21 million coins. However, it is important to understand that this supply is not fixed and increases every ten minutes until the final Bitcoin is mined in 2140. There are currently just over 19 million BTC in circulation, and the remaining coins will be mined over the next few years. 117. years.
Exchanges that provide a market to buy, sell, and stake BTC may be selling more Bitcoin than they have. This means that if all the Bitcoin owners who hold their BTC on the exchanges were to withdraw their funds at the same time, there may not be enough real Bitcoin to go around, as the exchanges may have printed more Bitcoin on paper and sold to unsuspecting customers. .
Something similar happened with the FTX cryptocurrency exchange when a large number of users tried to withdraw their funds simultaneously. The sudden rush to withdraw money put significant pressure on the ability of the exchange to meet demand. This, combined with other factors such as market volatility and liquidity problems, could have contributed to the collapse of FTX.
Misappropriation of funds
Exchanges often use Bitcoin from their users for remortgages, using the deposits as collateral to back a loan for their own benefit. These companies may offer Bitcoin holders incentives to keep their funds on the exchange, resulting in lower transaction costs, staking rewards, and reduced withdrawal fees. While these benefits may seem quite attractive, it is safer to keep BTC in a self-storage wallet.
For example, Sam Bankman-Fried “put billions of dollars of FTX client funds into” his Alameda Research crypto hedge fund, according to the SEC complaint. He then used it “as his personal piggy bank to buy luxury condominiums, support political campaigns and make private investments, among other uses.”
It is important to understand the intricacies surrounding Bitcoin ownership on centralized exchanges. By withdrawing your Bitcoin to an automatic storage wallet, you can ensure that you receive real Bitcoin and reduce risk exposure.
Disclaimer
BeInCrypto has reached out to the company or person involved in the story for an official statement on recent developments, but has yet to hear back.
