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Crypto Exchanges Offer ‘Paper Bitcoin’ Claims Market Analyst

2 mins
Updated by Kyle Baird
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In Brief

  • Rufas Kamau likens BTC on crypto exchanges to customers' money used by banks to make profit.
  • Some claim that if this kind of fractionalization were happening, the exchanges would be targeted and shut down.
  • The theory sparked a massive debate on Twitter.
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A market analyst has claimed that bitcoins held on exchanges are nothing more than “paper bitcoin” that depresses the price of BTC. Rufas Kamau of Scope Markets Kenya 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 amounts to little more than an “IOU” or “paper bitcoin.” Exchanges manage the real bitcoin in much the same way as a bank manages customer money; by selling, lending, and leveraging that liquidity for profit.

Or as Kamau puts it, “In simple terms, they print BTC.”

This leads to the proposition that when users buy bitcoin on an exchange, the liquid supply of bitcoins does not decrease as most people might expect.

“That is only true if they buy the IOU from an exchange and then withdraw immediately to self custody,” says Kamau. “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.”

Ultimately, by fractionalizing bitcoin, as a bank would fractionalize money, the price of bitcoin is pushed down. For Kamau, this is yet another reason, beyond security and privacy concerns, why BTC investors should remove their bitcoin from exchanges: to push the price of the asset upwards.

A point of discussion

The points raised by Kamau kicked off a lively discussion on crypto Twitter with a number of posters questioning the veracity of his claims.

“Are you referring to American-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’ve been shut down yesterday. This can’t be right.”

When pushed for proof of his claims Kamau argued that the issue was worth pursuing further, suggesting that his beliefs are based more on theory than on fact. 

Richard Heart was among the dissenters who took a different perspective, ignoring the fractional banking part of the argument entirely. Heart instead took issue with the statement that holding BTC on an exchange meant investors were “net short.”

“Nope,” said Heart. “You are net-long with counterparty risk. See Mt. Gox or QuadrigaCX to see how that works.”

In crypto parlance, this same sentiment is often expressed as “not your keys, not your bitcoin.” It’s a reminder that whether Kamau’s pet theory is right or wrong, there is still a compelling reason to keep your bitcoin on a cold wallet rather than on an exchange.

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Robert D Knight
Robert D Knight is a journalist and copywriter who has specialized in crypto for over four years. His varied experience includes freelancing, in-project contracts, agency work, and PR, giving him a holistic view of the blockchain industry.
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