What if CEX do not have BTCs? What is being traded then?

[a298b112]

The other day I was thinking about trading and trading platforms. Because I am new to the field, I might not understand certain things you guys might already know.

For example, when you buy a stock, say AAPL, how do you get out your AAPL from the exchange? In case of BTC you can send it to the hard wallet and then keep it there. Then I thought ok, probably buying a stock is just a record on a book. You never will see the physical stock (piece of paper). But then what if the exchange never had that stock?

And projecting this thought to the crypto exchanges, what if some well known CEX do not have enough BTCs that is being traded on that exchange? All that numbers and volume could be fake. Then the CEX is becoming like a traditional bank, where unless everyone will want to withdraw their BTCs, they are ok trading non existing BTCs. 

well, what do you think?

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[darkangel11]

In the old movies you can sometimes see people robbing houses or banks and instead of taking money bills they'd bag these bigger pieces of paper, the size of a large postcard. Those were stocks or bonds in the paper form, called certificates. I don't think they exist anymore. Maybe there are still companies that issue them, but it's more of a commemorative gift, or something given to large investors as a gift from the broker, or a company. Nowadays you do everything online. You open a brokerage account, or in case of bonds you can buy them on the government's website. They stay there on the account, you don't "take them out" the way you move bitcoin around.
This is done to prevent thefts like the ones from the movies where if they took your certificates you'd be left with nothing. Now the broker has your name and address and all the other details and if you lose access to your account you can recover it pretty much the same way you recover your mailbox, or a Netflix account.

Yes, the numbers provided by CEX could be fake and they could be insolvent. FTX was and so was MtGox. You don't know if they have the money which is why people recommend users to do their trades and withdraw. Don't treat CEX like a wallet.

[logfiles]

And projecting this thought to the crypto exchanges, what if some well known CEX do not have enough BTCs that is being traded on that exchange? All that numbers and volume could be fake. Then the CEX is becoming like a traditional bank, where unless everyone will want to withdraw their BTCs, they are ok trading non existing BTCs. 

well, what do you think?

But we had very perfect examples not so long ago. FTX became insolvent, and they had no funds/Bitcoins to issue to people who made withdrawals because they had misused customer funds, making the exchange to collapse and file for bankruptcy.

So many other services also experienced the same thing such as Celsius network, BlockFi etc

[blockman]

That can really happen and I think PayPal did that when they've just recently announced that they've added crypto into their platform and said that it's tradable ONLY there.
You guess it right that they're all numbers but they follow the price in the market and that's why it's truly possible that all of those numbers projecting in the spot market and balances were all just numbers until you request to withdraw it then that's how they're going to release the actual coins. But because of the ruckus that the earlier exchanges did, this gave the notice to the regulators that there should be some transparency that they can show to them and to their customers, obviously. I think the first one to do the proof of reserve thing is CZ for his company, Binance.

[Unbunplease]

We can only be sure that when we deposit/withdraw funds to CEX, real bitcoins are used. What bitcoins are traded on the exchange itself - we cannot know for sure. Also, keep in mind that there may be bots involved in trading, which may not use real bitcoins at certain times

[mk4]

This is the exact reason why it's always recommended to withdraw your long-term holdings onto your cold storage. If an exchange gets hacked, you'll end up safe; if an exchange is insolvent and a bank run happens, you get out earlier than your peers.

As for trading on CEXs — well, that's the risk you have to take. That's why I use futures DEXs for my trading(e.g. GMX, Gains, dYdX) as they're non-custodial.

[bittraffic]

I don't think exchanges can fake that. They know anyone would want to withdraw the BTC so everything that is traded in the exchange is available for withdrawal. They'd be labeled scam if they are not allowing withdrawals.

If there is less BTC volume then there are just a few people in the exchange buying and selling. Most probably the price of BTC in this particular exchange will be much higher or lower compare to the market price.

[adaseb]

When you buy a stock it’s basically electronic so you don’t see it but if you pay you can get a stock certificate and put that in your deposit box in the bank.

Keep in mind with stocks there are times when there can be more people holding shares than shares outstanding. It happens when people borrow to short. Basically the same share held by 2 people at least. With a physical stock certificate this obviously wouldn’t be possible.

[joniboini]

I don't think exchanges can fake that. They know anyone would want to withdraw the BTC so everything that is traded in the exchange is available for withdrawal. They'd be labeled scam if they are not allowing withdrawals.

Judging from how many exchanges went insolvent, I think it is fair to say that at the very least they need to provide proof of their sustainability. If they do that, users can see whether they have the ability to sustain their business if all users withdraw their BTC or coins at the same time. Even if they do that though, they can still lie or deliberately be misleading to avoid further questioning. I mean, even the latest FTX case can be solid proof that 'reputable' exchanges need more than just name and marketing to survive the market. You should not underestimate how scammy exchanges can be regardless if they are popular or not.

If there is less BTC volume then there are just a few people in the exchange buying and selling. Most probably the price of BTC in this particular exchange will be much higher or lower compare to the market price.

AFAIK, trading volume should not be a metric for reserves anyway. Exchanges can fake them anytime, or at least manipulate them to some extent to hide their insider trading or something similar.

[Minecache]

I don't think exchanges can fake that. They know anyone would want to withdraw the BTC so everything that is traded in the exchange is available for withdrawal. They'd be labeled scam if they are not allowing withdrawals.

If there is less BTC volume then there are just a few people in the exchange buying and selling. Most probably the price of BTC in this particular exchange will be much higher or lower compare to the market price.

FTX is the most recent example, they don't have enough liquidity as people rush to withdraw assets. It doesn't just happen with centralized exchanges, but even the banks you are depositing with have the same problem. They use our deposits to invest in other areas, so when something goes wrong, they can't fill their budget, and if everyone rushes to withdraw money, it will lead to lack of liquidity. What you get for depositing money in an exchange or bank are just virtual numbers, and they can give you as much as you want. Bitcoin will only be yours if it is in your personal wallet.

[Husires]

The simple idea for all central platforms is that you deposit money to them, and in return they update their database, and so you do not need that money unless you decide to withdraw here. The platform must have enough currencies to meet the withdrawal.
Just like banks, the platforms invest that money to make more resources available to them, but on the condition that when any customer wants to withdraw his money, there must be sufficient funds for that.

Problems occur when:

• There is not enough deposit.
• There are a lot of withdrawals without keeping the funds in the platform.
• Money is not invested so that its return is good.
• Clients' money is exploited and squandered for personal interests.

They are the main reasons that lead to bankruptcy of platforms.

[StarKay]

Here is where CEX and DEX differs, unlike DEX there are no realtime transfer of assets during trading in CEX, instead txs are recorded on a database. So you should know that CEX is much more like your stockbroker and there is a chance that they don't have your coins. To be on the safe side, it is advisable to always withdraw your funds from CEX after trading.

[palle11]

For example, when you buy a stock, say AAPL, how do you get out your AAPL from the exchange?

To this question you can withdraw altcoins just like you can withdraw your bitcoin and that is how you will get it out. There are some wallet that enable some altcoins to be stored in them like erc20. So if you have a coin in eth blockchain you can use erc20 wallets to safe your altcoins. Remember if you don't have direct access to your coin alone, it is still available to everyone including the exchange.

[Eternad]

The other day I was thinking about trading and trading platforms. Because I am new to the field, I might not understand certain things you guys might already know.

For example, when you buy a stock, say AAPL, how do you get out your AAPL from the exchange?

Buying stocks means you have a contract stating that you are partially an owner of a corporation. Typically broker is the one creating those contract when you buy and sell. This contracts will give you ownership to your stocks and there’s a huge difference between stocks and cryptocurrency so you should not compared them as similar thing.

Bitcoin can be compared to Gold and Fiat because it’s currency in crypto.

And projecting this thought to the crypto exchanges, what if some well known CEX do not have enough BTCs that is being traded on that exchange? All that numbers and volume could be fake. Then the CEX is becoming like a traditional bank, where unless everyone will want to withdraw their BTCs, they are ok trading non existing BTCs. 

well, what do you think?

This is actually what’s happening on CEX for example FTX, FTX liability is greater than their assets that makes them collapse after their customers pull out their balance. Some CEX is using their customer money on different investment just like banks doing on our money but crypto is worst because there’s no transparency on the proof of reserves that will show customer balance is 100% backed by exchange reserve.

[mk4]

I don't think exchanges can fake that. They know anyone would want to withdraw the BTC so everything that is traded in the exchange is available for withdrawal. They'd be labeled scam if they are not allowing withdrawals.

Exchange have faked it in the past (most recently, FTX). These exchanges can operate as normal not unless their users attempt a massive bank run. This is the reason why the "proof of keys" movement was created, to check the solvencies of centralized exchanges.

[Jawhead999]

Usually when the CEX do not have BTC and their customers want to withdraw their coins, they will frozen the customer coins and accuse something, then they will ask a time to proceed further investigation or they will make your transaction pending and the reason is security check.

Although it's just my assumptions, but that's what high likely happen if the CEX have fake trading volume.

[GreatArkansas]

Usually when the CEX do not have BTC and their customers want to withdraw their coins, they will frozen the customer coins and accuse something, then they will ask a time to proceed further investigation or they will make your transaction pending and the reason is security check.
(...)

This is very common especially when you withdraw a large amount in just a single transaction, especially those exchanges who got low trading volume and are really scamming their users.
There are already a lot of cases just like this especially when an exchange uses their customers' balance for their own benefits.

Always think that once you deposit your funds to an exchange, it's not yours already, you are now just holding numbers from your account.

[rat03gopoh]

well, what do you think?

Traders only trade digits regardless of any reason that the exchange fully reserves bitcoins.
FTX has disclosed the fact that exchanges are likely to engage in high-risk practices that could potentially deprive customers of bitcoins through some third-party business schemes.
After the FTX collapse, regulation has increasingly been in the midst of clamping down on the transparency of CEXes with multiple audit policies, though some argue that's not enough and discourage traders from putting too much faith in the results.

[Ryker1]

^[snip]

And projecting this thought to the crypto exchanges, what if some well known CEX do not have enough BTCs that is being traded on that exchange? All that numbers and volume could be fake. Then the CEX is becoming like a traditional bank, where unless everyone will want to withdraw their BTCs, they are ok trading non existing BTCs. 

well, what do you think?

Everything that does not appear in a blockchain per transaction, considering it is a fake or not accurate number exists on exchange because everything is on-chain. Perhaps this could possibly lead to a situation where the volume and numbers reported by the exchange are not entirely accurate, and users may unknowingly be trading non-existent BTCs because it is not recording on a blockchain.
I think the best move is to choose reputable exchanges and take steps to ensure that they have sufficient reserves to cover all trades. For example --they may periodically conduct audits of their reserves and publish the results publicly to increase transparency to the public, that is how you will a reputable exchange and already tested.

[logfiles]

Usually when the CEX do not have BTC and their customers want to withdraw their coins, they will frozen the customer coins and accuse something, then they will ask a time to proceed further investigation or they will make your transaction pending and the reason is security check.

Although it's just my assumptions, but that's what high likely happen if the CEX have fake trading volume.

You are right

I think even FTX started showing signs of delayed withdrawals right before they completely shut down

Another thing I think exchanges do is to put the wallet under "maintenance" especially on the withdrawal option yet the deposits option could very well still be active. This is to avoid users from withdrawing their coins until they (the exchange) get enough funds