- Bitcoin exchanges around the world are not mandated to prove their funds
- While a few do prove their funds, a whole bunch don’t and this could be really bad for Bitcoin
- This could lead to a pile of exchanges collapsing should a mass cash out event occur
Crypto exchanges around the world all offer Bitcoin markets, but how do you know if it’s real Bitcoin and your Bitcoin has been accounted for? Could it just be numbers in the air and fake Bitcoin, or a Bitcoin CFD? There’s a good chance you’d never know, and you always run the risk that what you’ve bought isn’t real Bitcoin.
Several big exchanges already allow you to audit these numbers and some have even employed auditing firms to do this for them, further adding credit to their claims. But, a lot of smaller exchanges still don’t do this. Why is it not a legal requirement yet? Who knows!
Beware of the Platforms That Don’t Let You Withdraw or Deposit
There are loads of platforms out there that claim to offer the ability to buy, hodl and sell Bitcoin, but you can’t actually deposit your own Bitcoin or withdraw your Bitcoin. Why? This is actually likely because that you don’t even own Bitcoin when you buy it through them. You’re often buying an asset-linked vehicle, such as a CFD. This means you don’t own real Bitcoin and if you do, you will be owning a tiny segment of what you think you do.
But Why is This an Issue?
For these smaller exchanges that don’t let you withdraw and deposit your own Bitcoin, it could become a bit of an issue because it’s misleading and it’s not real. You’re not actually buying Bitcoin, you’re buying shared ownership of a tiny fraction. Most of these firms are regulated and the fiat that you’ve deposited in your account is there, but what happens if you hodl Bitcoin with them and Bitcoin rises in value? Because the exchange isn’t actually buying Bitcoin, they’ll have to dip into their own pockets to pay out any gains.
Over the short term, as long as traders make losses along the way, this shouldn’t be too much of an issue. The real issue kicks in when a cryptocurrency goes wild and does a 10x. If people all try to cash out at the top, the platform could end up not having enough money to cover all the profits traders have made. This is the issue.
How Can We Prevent the Issue?
This might seem a bit scary. Imagine Bitcoin reaches a new ATH and hits $25,000 and you bought Bitcoin on one of these platforms back when it was $3,000 – that’s a massive 733% increase. If the platform didn’t buy Bitcoin in the volume you thought you bought, they will get gouged. The worst part? If enough traders on the platform did the same thing and all go to cash out, the company’s accounts could drop below 0 or you won’t be allowed to cash out.
If you want to steer clear of these issues, just buy Bitcoin from a legitimate exchange where you can touch the Bitcoin you buy. Make sure you can deposit Bitcoin and withdraw your Bitcoin to your very own hardware wallet. If the exchange you’re using doesn’t offer this, consider cashing out and getting the hell outta Dodge.
Run for the Hills
This warning applies to a ton of applications and exchanges out there. If you’re one of these apps and you don’t allow this feature, be like Kraken or CoinFloor. Get in an auditor to prove that you have as much Bitcoin as your customer has bought. If you’re a trader, avoid any exchange that doesn’t have the proof that they own all the Bitcoin they claim to have.