When BTC tokens are held on centralized platforms, the owner cannot know for sure if they are getting real bitcoins or “paper bitcoins”.

As Bitcoin’s popularity continues to grow, more and more people are turning to centralized exchanges (or crypto exchanges) to purchase the digital currency. However, it is important to understand that when BTC tokens are held on centralized platforms, the owner cannot know for sure if they are getting real bitcoins or “paper bitcoins”.

Paper Bitcoin is a “Bitcoin of ₿” type, which means that the crypto exchange owes the user a certain amount of the digital currency in question.

To ensure that the BTC purchased is genuine, the investor must withdraw it to an independent crypto wallet, or sell it for another asset or commodity. This is because most cryptocurrency exchanges do not create a separate wallet for users in order to save on transaction fees. Instead, these companies display bitcoin balances as a number next to the username on a simple spreadsheet.

“Not Your Keys, Not Your Coins”

The famous phrase “not your keys, not your coins” is a popular saying in the crypto community, meant to emphasize the importance of owning the private keys to the cryptocurrencies one owns. This means that if an investor is not in control of the private keys associated with their crypto, they do not actually own the funds in question.

Conversely, if an investor is in control of their private keys, then they have full ownership and control of their cryptocurrency, and can transact it as they see fit.

Crypto exchanges tend to keep their BTC in wallets for which they hold the private keys and where they store them securely. This is because if they were to transfer small amounts of BTC to a user’s wallets every time merchants buy and sell within the crypto ecosystem, exchanges would incur significant transaction fees.

Exchanges that provide a market for buying, selling, and staking BTC can sell more bitcoins than they have. This means that if all the bitcoin owners who hold their BTC on these crypto platforms withdraw their funds at the same time, there may not be enough real coins to go around, as the exchanges could have produced a larger amount of paper bitcoins and sold them at trusting customers.

A Case of Embezzlement in a Cryptocurrency Exchange?

Crypto platforms often use their users’ bitcoins for remortgage purposes, using their deposits as collateral for a loan for their own benefit. Therefore, these companies can offer incentives to bitcoin holders to encourage them to keep their funds on the platform, allowing them to reduce transaction costs and withdrawal fees or increase staking rewards, among other things. While these benefits may sound very attractive, it is still safer to hold BTC in a separate wallet.

It is important to understand the intricacies surrounding BTC ownership on a centralized crypto exchange. However, by withdrawing your bitcoins to a separate wallet, you can ensure that you hold real bitcoins, and therefore, reduce your risk exposure.

By Audy Castaneda

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