Do exchanges really hold your Bitcoin? An analyst thinks otherwise, challenging the common perception. While keeping your cryptocurrency on an exchange may seem like the convenient option, it comes with hidden risks that could leave you “holding the bag.” Many believe that when buying Bitcoin on centralized exchanges, you may be getting paper Bitcoin instead of real Bitcoin. Centralized exchanges can sell more Bitcoin than they actually hold, creating potential vulnerabilities.

But is this always the case? Some argue that certain exchanges implement strict protocols to ensure they have the Bitcoin they claim. However, as exemplified by Bitcoin Spot ETFs, leaving your bitcoin in the hands of a custodian prevents you from being able to use the underlying technology that makes bitcoin so unique – self-custody.

The core of the debate hinges on control. You sacrifice control for convenience. You trust the exchange to secure your Bitcoin. As we discuss elsewhere in the article, however, even if you hold your cryptocurrency on your phone, forget your seed phrase, or fail to secure it properly with two-factor authentication, you also risk losing your funds. Therefore, understanding the trade-offs between exchange custody and self-custody is critical for any Bitcoin investor. Ultimately, the 'analyst's' viewpoint may highlight the nuances and the potential for certain exchanges to manage Bitcoin responsibly, but individual risk tolerance and understanding of custody options remains paramount.