One market analyst has claimed that bitcoins held on exchanges are nothing more than “paper bitcoins” that drive the price of BTC. Scope Markets Kenya’s Rufas Kamau made the statement in a Twitter thread on May 8, but not everyone agrees with the analyst’s thesis.
According to Kamau, a bitcoin that is bought and held on an exchange is little more than an “IOU” or “paper bitcoin”. Exchanges manage actual bitcoins in the same way that banks manage customer money; Selling, lending and taking advantage of that liquidity for profit.
Or as Kamau puts it, “in simple words, they print BTC.”
This leads to the proposition that when users buy bitcoins on an exchange, the liquid supply of bitcoins does not decrease as most people might expect.
“This is only true if they buy an IOU from an exchange and then immediately withdraw into self-custody,” Kamau says. “If they put their newly acquired bitcoins on the exchange, they are not reducing the supply, in fact, they are giving the exchange more liquidity to make more fractions.”
Ultimately, by splitting bitcoin, as a bank would split money, the price of bitcoin is pushed down. For Kamau, this is another reason, beyond security and privacy concerns, why BTC investors should delist their bitcoins from exchanges: to push the asset’s price upwards.
a point of discussion
The issues raised by Kamau sparked a lively discussion on Crypto Twitter, with many posters questioning the veracity of his claims.
“Are you referring to US-based exchanges?” asked one skeptic, “I can’t speak for other countries, but if exchanges are acting as banks doing fractional reserve banking without a bank charter they would have closed tomorrow. That can’t be right.”
When pushed for proof of his claims, Kamau argued that the issue was worth pursuing, suggesting that his beliefs are based more on theory than fact.
Richard Hart was among the dissenters who took a different approach, completely ignoring the fractional banking part of the argument. Instead Hart took issue with the statement that holding BTC on the exchange meant investors were “net short”.
“did not say Heart, “You are net-long with counterparty risk. Check out Mt. Gox or Quadriga CX to see how it works.”
In crypto language, the same sentiment is often expressed as “not your keys, not your bitcoins”. This reminder that Kamau’s pet theory, true or false, is still a compelling reason to keep your bitcoins on a cold wallet rather than an exchange.