Crypto Exchange 'Sells And Lends' Bitcoin 'For Profit,' Contributes To Price Decrease, Analyst Says

Storing digital assets on centralized exchanges often comes with its risks. Taking this into account, an analyst has offered a comprehensive explanation of what really happens when one lets exchanges keep their crypto assets.

Rufas Kamau, Research & Markets Analyst at Scope Markets Kenya, said, "If you buy Bitcoin and keep it at the exchange, you are net short, you are contributing to the price of Bitcoin going down, even if your goal is higher prices." Kamau says buying Bitcoin on exchanges is simply buying an "I owe you (IOU), which he said is just "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," the analyst explained, noting that it is the reason why exchanges set "high withdrawal fees."

He added that exchanges, as much as possible, want to keep investors' Bitcoin because as it is a DeFi bank, "it sells and lends your Bitcoin for profit." The research and markets analyst also explained investors who allow exchanges to keep their Bitcoin face a deficit because the process enables crypto exchange platforms to "print" Bitcoin, because as the quantity grows, the price lowers.

"If they keep their newly acquired bitcoin on the exchange, they are not reducing the supply, in fact, they are giving the exchange more liquidity to create more fractions," Kamau said. "This pushes the price of Bitcoin down," he added.

He also challenged crypto investors to log in to their crypto exchange platforms and "withdraw their Bitcoin right now," wondering if "the exchanges have all that Bitcoin available to honor all the IOU Bitcoin they have issued." Kamau also encouraged investors to "keep your Bitcoin off the exchange" saying it is the "logical thing to do if you want to change the world with Bitcoin."

Many were not convinced by Kamau's explanation, noting that the analyst's claims were nothing but "wild allegations." LBank chairman Eric He admitted that this may be happening at some crypto exchange platforms.

"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," the executive explained. Binance, a crypto exchange platform, also disagreed with Kamau's claims noting that exchanges have no authority to move their users’ funds and that it only happens with the investor's consent.

Bitcoin was trading down 2.74 percent at $30,916.45 with a 24-hour volume of $55,766,130,900 as of 4:23 a.m. ET on Wednesday based on the data from CoinMarketCap.