Security breaches and hacks often highlight the risks of storing Bitcoin (BTC) on centralized exchanges. One analyst has even claimed that keeping BTC on exchanges is also a factor for price dips.
Rufas Kamau, research and markets analyst at Scope Markets Kenya, explained his thoughts on why keeping BTC on an exchange lowers the coin’s price. Kamau believes that buying BTC on exchanges only amounts to buying an “I owe you,” or 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.— Rufas Kamau ⚡ (@RufasKe) May 8, 2022
That explains the high withdrawal fees.
The analyst also pointed out that exchanges create many ways to discourage withdrawing BTC, such as high withdrawal fees. On the other hand, exchanges encourage keeping BTC on the exchanges by providing staking services.
According to Kamau, this is done because the exchanges sell the Bitcoin they custody to other buyers while the owner of the IOU stays happy earning an annual percentage yield on their BTC.
Kamau claimed that because of this process, investors who keep BTC on exchanges suffer a deficit, as it enables exchanges to “print” Bitcoin — and as the supply goes up, the price goes down. He also urged users to keep their holdings off of exchanges, calling it the “logical thing to do if you want to change the world with Bitcoin.“
Similarly, Twitter user BTCSchellingPt also sent a warning to keep people's crypto off the exchanges. They said that in a filing made by Coinbase, it’s stated that in the event of a collapse, the users' coins will become the property of the exchange.
Get your #btc off exchanges@coinbase $coin noting in their 10-Q filing that *your coins* are *their property* in event of collapse, and you're treated as an unsecured creditor— WizardofAus 丰⚡ (@BTCSchellingPt) May 11, 2022
They just posted $400m loss
Not your keys, not your #btc pic.twitter.com/9ZZiZO2t5n
While many accounts liked and retweeted Kamau’s thread on Twitter, not everyone agreed with his remarks. Twitter user Koning_Marc responded, calling the allegations “wild speculation at best.” Additionally, Twitter user Felipe Encinas replied that if this were the case, exchanges would be able to short BTC without having it, which “can’t happen.”
Crypto exchanges did not deny that this may be happening at some exchanges. However, LBank chairman Eric He told Cointelegraph that exchanges that do this will be taught a lesson. He explained:
“The market will teach exchanges that sell users’ Bitcoin a lesson because they will not be able to buy back the Bitcoin they sold. Exchanges like this will surely fail."
He further explained that digital asset exchanges that are thriving and expanding are “firm crypto believers” that believe that BTC can hit the $100,000 mark and therefore have been buying more instead of doing shady things like selling other people's coins.
Binance also weighed in on the issue. In a statement, a Binance spokesperson told Cointelegraph that exchanges are not authorized to move their users’ funds without consent. Within Binance, they said that the company does not take positions and that “Users’ crypto assets are safely stored and custodied in offline, cold storage facilities that are maintained within the exchange.”