Security breaches and hacks often highlight the risks of storing Bitcoin (BTC) on centralized exchanges. One analyst even claims that holding your BTC on exchanges is also a factor for price drops.
Rufas Kamau, research and markets analyst at Scope Markets Kenya, explained his opinion on how holding BTC on an exchange drives down the price of the coin. Kamau believes that buying BTC on exchanges is only equivalent to buying an “I owe you” (IOU) which he describes as “paper Bitcoin”.
If you buy Bitcoin at the exchange, you are buying paper Bitcoin, an IOU from your exchange that’s settled the moment you decide to transfer your Bitcoin outside the exchange.
That explains the high withdrawal fees.
2/n
– Rufas Kamau aš¡ (@RufasKe) May 8, 2022
The analyst also proceeded to point out that exchanges create many ways to discourage BTC withdrawals, such as high fees to process one. On the other handexchanges encourage the storage of BTC within their platforms by providing staking services.
According to Kamau, This is done because the exchanges are able to sell the bitcoins within their platforms to other buyers, while the owner of the “Paper Bitcoin” stays happy by earning an annual percentage yield on their holdings.
Due to this process, Kamau states that investors who buy BTC and hold it on exchanges suffer a shortfall, as the process allows exchanges to “print” Bitcoin and as supply increases, the price falls. He also urged users to keep their holdings off exchanges, as it is the “logical thing to do if you want to change the world with Bitcoin.”
Although many liked and retweeted Kamau’s thread on Twitter, not everyone agreed with his observations. Twitter user Koning_Marc answered to Kamau saying his thread is “wild speculation at its purest.” Also, the Twitter user Felipe Encinas also responded that if this was the case, exchanges are capable of shorting BTC without holding it. Encinas said this “cannot happen.”
Cryptocurrency exchanges did not deny that this may be happening on some platforms. However, LBank president Eric He told Cointelegraph that exchanges that engage in this practice will be taught a lesson. Explaining that:
“The market will teach exchanges that sell users’ bitcoins a lesson because they won’t be able to buy back the bitcoins they sold. Such exchanges will surely fail.”
He further explained that the digital asset exchanges that are thriving and expanding right now are “firm believers in cryptocurrencies.” They are the ones who believe that BTC can hit the $100,000 mark and thus have been buying BTC instead of doing shady things like selling other people’s bitcoins.
Binance has spoken about it. In a statement, a Binance spokesperson told Cointelegraph that exchanges are not allowed to move their users’ funds without consent. Inside their company, they said they don’t take positions and “users’ crypto assets are safely stored and escrowed in offline cold storage wallets held within the exchange.”
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
Keep reading:
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.