The Dark Side of Crypto Exchanges: Are Your Coins Really There?

Ever wondered what really happens when you "stake" your coins on an exchange?

When you hit that ‘Stake’ button on many exchanges, instead of genuinely staking your coins, it’s often just a visual JavaScript representation and SQL record. Essentially, your staked amount is just a number in their database. They may not truly stake all your coins. Instead, they merely need to deliver the promised returns to you.

This pseudo-staking allows exchanges to engage in what’s termed ‘Exposure’ in financial parlance. Imagine this: for every amount of coins you “store” with them, they could theoretically trade or sell more then half additional coins - but these are virtual coins , existing only in their databases. How? Only single digit % of customers would ever withdraw their coins to local wallets at the point they actually need to be recorded on the blockchain ledger.

Recall the last bull run when coins skyrocketed? Many exchanges temporarily paused withdrawals and sometimes even trading. The harsh truth? They probably didn’t have half of the coins people thought they have on their accounts. It wasn’t on the blockchain; it was in their SQL databases. They were waiting prices to drop to reduce their exposure.

Now, while there's a widely accepted fact that there is a limited amount of coins in existence, I'd wager exchanges might've "sold" much more - just virtually. Unless you store it in your own wallet, coins you think you have there is not recorded on blockchain.

The worrying part? A vast majority of the crypto "held" on exchanges may never actually exist on blockchain ledgers. Only a small fraction of users typically transfer their assets from exchanges to personal wallets, making Ponzi scheme sustainable.

Remember, crypto exchanges aren’t regulated in the same way banks are. But, hey, we’ve seen that even traditional banks play similar games.

You can image how this unlimited virtual supply of crypto suppresses price.