Note that storing crypto on centralised exchanges is indeed a risky venture from a security point of view. The fact is that exchanges' wallets are hot, meaning they are connected to the internet. Consequently, they can be accessed by hackers who operate online.

There are more than enough successful examples of such activity. For example, the KuCoin platform fell victim to a hack in September 2020. We wrote about it in more detail in a separate article.

An alternative to hot wallets are cold wallets – that is, those that store private keys offline. Examples of cold stores include the hardware wallets we are already familiar with. In the case of the latter, transactions are signed in an isolated environment, so the private keys never leave the confines of the device. Such devices are recommended for users who store relatively large amounts of money in crypto.

What crypto exchanges are criticised for

Kamau tweeted his thoughts, which were later published by news outlet Cointelegraph. Here’s his rejoinder, in which the analyst shares his view of what’s going on.

If you buy Bitcoin on an exchange, you are buying “paper coins” – a promissory note from your platform that is redeemed the moment you decide to transfer BTC off the exchange. This explains the high withdrawal fees.

Note that coins on exchanges really can't be considered your property. The reason is that there are no private keys to the address where the digital assets are stored. Naturally, only the management of the trading platform has them, which makes users have to request withdrawals and get permission for other transactions. Of course, this is common practice for crypto platforms, but it is important for investors to be aware of this feature.

Very many exchanges have different withdrawal fee discounts: the more coins you have on your balance, the bigger the discount. Exchanges also provide coin-stacking services. Here’s how Kamau explains this scheme.

Let’s say you leave 1 BTC in stacking on an exchange for a year without touching it. The exchange sells/loans, say, 0.9 of your bitcoin to person XX. However, you are left with a promissory note, plus after a year you will receive income from the steaking. Person XX pays the money back, and the process is repeated over and over again. Simply put, exchanges print BTCs.

“Printing” in this context should be understood as an increase in the supply of coins on exchanges. The analyst hints that trading platforms are, in theory, selling even more “paper bitcoins” than the number of real coins in their wallets. LBank chairman Eric He noted that Kamau’s claims may be true, but those exchanges that do so are doomed to fail. Still, a market collapse in such a case could lead to their “extinction”.

The recent Bitcoin crash below $30k has already had a negative impact on the shares of many cryptocurrency companies and the same exchanges. Coinbase, for example, has fallen 35 percent in the last couple of weeks. Since the beginning of the year, the drop looks catastrophic at all. On January 1, COIN shares were trading at $250, but by today the price had dropped as low as $73.

The reason for it was also financial results of stock exchange for the first quarter. They turned out to be lower than analysts expected.

Similarly bad trading conditions for shares of MicroStrategy, which actively buys BTC on balance. In a few days, MSTR shares have dropped in value by at least 37 per cent.

And this is how the stock performance of publicly traded Bitcoin mining companies looks like. Naturally, they are not doing well at the moment.

All of this could be a clear sign of the beginning of another bearish trend in the cryptosphere. Too many investors are already at a loss and it is unlikely that the price of digital assets will rise quickly in the foreseeable future because of this. Most likely, there will be quite a long period of low volatility or another wave of decline ahead. However, it is simply impossible to guess anything in such a volatile niche, so everyone has to act according to his or her own calculation, thus taking responsibility for what happens.


We think that there is a grain of truth in this version, because exchanges can indeed make transactions with coins. However, they will hardly manage to abuse it, because in case of mass withdrawal of crypto due to some event, such scheme will be obvious, and the platform will become a part of the past. So, in this case we should not worry too much about existence of such scheme.


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