Security breaches and attacks often highlight the risks of storing Bitcoin (BTC) on centralized exchanges. One analyst even claims that keeping your BTC on exchanges is also a factor for price drops.
Rufas Kamau, Research and Markets Analyst at Scope Markets Kenya, explained his thoughts on how holding BTC on an exchange lowers 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 on the exchange, you are buying paper Bitcoin, a promissory note from your exchange that settles the moment you decide to transfer your Bitcoin off the exchange.
That explains the high withdrawal fees.
2/n– Rufas Kamau ⚡ (@RufasKe) May 8, 2022
The analyst also goes on to point out that exchanges create many ways to discourage BTC withdrawals, such as high withdrawal fees. On the other hand, exchanges encourage holding BTC within exchanges by providing staking services.
According to Kamau, this is done because exchanges can sell Bitcoin held within the exchanges to other buyers, while the owner of the Bitcoin note stays happy by earning an annual percentage yield on their BTC.
Because of this process, Kamau claims 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 because it is “the logical thing to do if you want to change the world with Bitcoin.”
While many liked and retweeted Kamau’s thread on Twitter, not everyone agreed with his comments. Twitter handle Koning_Marc answered to Kamau saying his thread is “wild speculation at best”. Furthermore, Twitter user Felipe Encinas also responded that if this were the case, exchanges can short BTC without having it. Encinas said that this “cannot happen.”
Related: Understanding Staking Pools: The Pros and Cons of Cryptocurrency Staking
Crypto exchanges did not deny that this may be happening with some exchanges. However, LBank president Eric He told Cointelegraph that those exchanges that do this practice will learn a lesson. He explained that:
“The market will teach exchanges that sell Bitcoin to users a lesson because they will not be able to buy back the Bitcoin they sold. Trades like this are bound to fail.”
He further explained that the digital asset exchanges that are thriving and expanding right now are “firm believers in crypto.” They are those 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 Bitcoin.
Binance weighed in on the issue. 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 that they do not take positions and that “users’ crypto assets are securely stored and escrowed in offline cold storage facilities that are kept within the exchange.”