Bitcoin Forum

Hi,

Are the exchanges using Rehypothecation, where the same Bitcoin can be used as collateral several times causing instability?

Does Rehypothecation actually cause a decline in prices?

Rehypothecation is a well known Wall Street practice to create excess profits.

https://www.investopedia.com/news/how-commingling-and-rehypothecation-affect-bitcoin/

I think this is something that's annoyed a lot of investors about futures platforms in the past (it's potentially still ongoing too).

There is a possibility a lot of traded crypto aren't backed by anything, this is less likely with more trusted exchanges (like coinbase) but it could still be a practice to an extent. Exchanges trading using statistics based on what their users are doing might cause a greater price change - and also the chance that exchanges could realistically make money by increasing the spread between currency buying and selling (which is what a lot of exchanges already do).

Are exchanges using rehypothecation?  Many people think so.  It's extremely likely that they are if they are able to.  This is why there is always a constant voice to get BTC off of exchanges.  The thought is that if everyone withdrew their BTC, the exchanges wouldn't have enough BTC to send everyone and would have to purchase more on the open market.  If there isn't enough BTC for sale to fill all of the withdrawals, what happens?  Exchanges go bankrupt, the price goes as high as is possible with the funds that are left, and those who held onto their own BTC would be wildly rich.

Does rehypothecation cause a decline in price?  Yes.  Simple supply and demand.  They're creating supply out of thin air that doesn't exist to meet demand instead of allowing the market to correct with a natural price. 

With Bitcoin, it would be extremely easy for exchanges to publicly prove their reserves 24/7.  Nobody uses Bitcoin for it's transparency though, unfortunately.  It's just about hodling and pumping.  If any exchange actually cared about Bitcoin, they would give up to the second publicly accessible feeds that showed their customer deposit numbers as well as a list of addresses that hold all their coins.  100% transparency is easy when you're honest.

Shouldn't centralized exchanges be more transparent with their profit making methods, especially with regard to trading of Bitcoin and other crypto?
 

Sure, but we’ll only find out when it’s too late. But that’s where self custody comes into play, everyone can do it now. Doesn’t make sense to wait till it’s too late. Self custody is also in the interest of every hodler, because it can help the price out, the more people do it.

Economy is always about incentives and exchanges have no incentive to be transparent, if they make more money like this, because after growing to a certain size companies are only ruled by profit.

I think that rehypothecation is a common practice for many exchanges but not only. In my thread i was elaborating about the possibility of using fractional reserve system for exchanges.

https://bitcointalk.org/index.php?topic=5094088.msg49096584#msg49096584

Situation in which exchange can have only x real bitcoin on cold wallets while 10x fake bitcoin on its books being traded by people that think that trade real bitcoin.

The way to fight it (at least to the certain extand) is to take part in Proof of Keys Day (https://www.binance.vision/security/the-ultimate-guide-to-proof-of-keys-day) and promote it to others.