If Your Bitcoin Is on an Exchange, What Can You Actually See on the Blockchain?

[Sammysmart001]

Just imagine opening your exchange app or website, and seeing 0.05 BTC as your balance. You can sell it, trade it or even withdraw it. But if you are ask to point out this 0.05 BTC on the Blockchain can you ?

Which part of your own exchange balance is visible on on-chain and which of the part do lives only in the exchange data base?

1.Your balance is not the blachain balance
The 0.05 BTC in your exchange balance does not mean that there is a UTXO out there carrying your name on it. Just like your usual bank app showing ₦400k, This were the exchanges database records the amount their owing you. The Blockchain has no idea of who Mr A is. First lesson

2.Deposits are on-chain
Giving an example of you sending 0.05BTC from your BlueWallet to your  Binance deposit address, this transaction hits the blockchain. Anyone can find the transaction outputs, input, TXID and confirmations also. Then your exchange credits your own account internally. The records will be reading this Your Blockchain: 0.05BTC move to so address. While your Exchange: Credit Sammy +0.05 BTC. You it two different records.

3.Trading stays off chain
 In a situation you buy 0.02 BTC from a different use on same exchange, does your blockchain shows that user A sent 0.02 BTC to Sammy ?  No it doesn’t. All the exchanges will do, it just edits the ledger as User A -0.02 BTC, then Sammy +0.02 BTC. For that very internal transfer there will not be a separate Bitcoin transaction need to be broadcast. So for that movement there is no separate Onchain miner fee. This why you see users can trade multiple times without having to create separate Bitcoin transactions for every trade done. Most of our existing discussions here, explains the distinction between Onchain transactions and internal exchange.

4.Withdrawals are real transactions
As you click Withdraw 0.02 BTC to your wallet. The exchange build a real Bitcoin transaction broadcast it and pays the fee. Then you now see TXID, inputs, outputs and confirmations on a block explorer such as Mempool. Before your withdrawal individual balance is being represented in exchange internal Ladger. Exchange haven’t yet sent that amount to your personal wallet on the blockchain.

Your balance on your exchange is an entry in the exchange internal ledger. The Blockchain those not carry’s the record of your exchange username as the owner of the balance.
So in a situation were your exchange account is being hacked or frozen, does blockchain know you own source balance ?

This is why not your keys not your coins is more than a slogan.

Question
Have you for once tried to trace your exchange balance on-chain abd you got lost ? What was the shock the first time you understand this ?
Reference: For those of us that would want to understand more about how Bitcoin transaction, input and output works this will help out: https://developer.bitcoin.org/devguide/transactions.html

[Questat]

This is actually the part where it confused me before, but later I understood that the wallet address given by the exchange is actually controlled by them. So whenever we deposit there, the bitcoin is already under their control and our balance is only recorded in their database.

They are the only ones who know how that balance is accounted for internally, and they can also transfer those coins to another address they own. So when we withdraw, the bitcoin we receive does not necessarily come from the same wallet where we deposited. It can come from another wallet controlled by the exchange, since internally our balance is basically just an account record.

[Outhue]

You are right, you are simply giving them your Bitcoin for the time being, and for that time being it's not actually yours again until you withdraw from that exchange back into your hardware wallet. It doesn't take me too long to understand that exchange are not the places for my Bitcoin, many of them died and I've been a victim like twice already.

The little difference is some Centralised exchanges are more reliable than others, as Binance and few others have proven their reputation when funds was lost, they reimburse all affected traders on their platforms, I can remember what happened with Huobi years ago, I thought my Bitcoin was gone and later I got it back, Binance did the same but centralised exchanges are all still centralised, which I believe that they aren't that friendly to my Bitcoin, anything can still happen and that total control is what your own private bitcoin wallet can only give you.

[SilverCryptoBullet]

This is why not your keys not your coins is more than a slogan.

I would like to keep it short like this.
"Not your keys, not your coins"
"Your keys, your coins".

When you fund your accounts on centralized exchanges, you make an on chain transaction, and after that transaction is confirmed, in theory you lost your coins already. Because after that transaction, you are no longer able to control your coins by lack of access to private keys. The only entity has access to private key is that centralized exchange, not you, and if you want to access your coins, you must request them to proceed a withdrawal for you, send it back to your non custodial wallet.
Bitcoin Q&A: Not your keys, not your coins.
Events made you scare about custodial wallets, centralized exchanges.

[Exitoral]

The blockchain it self doesn't keep records of who owns which coin. That's what Centralised platforms do. With just the Blockchain, you can't say who owns what and this coin. The centralised platforms do because they ask for your KYC, so they can actually tell the person that owns this coin. Even though you can find the Centralised exchange address on the Blockchain, you can't say for sure whether your coins are there just because you saw they address. That's why that phrase of you owning your coins in decentralised platforms will keep on ringing.

[OcTradism]

You fund your account on an exchange by an on chain transaction, that is public and traceable by everyone and through Bitcoin block explorers.
List of useful Bitcoin block explorers.

If you want to prove ownership of the 0.05 BTC, it's easy. Let's sign a Bitcoin address from the wallet and private key from which you sent your bitcoins to that exchange.

Two things to know after you made that transaction: you sent your bitcoin to the exchange's hot wallet, after that the exchange will automatically move your bitcoin to its cold wallet. It's easy to check with Bitcoin block explorers but clearly you no longer control any private keys and become dependent on the exchange for moving your bitcoin to other exchanges or to your non custodial wallets.

[Mr_Brilliant$]

This is actually the part where it confused me before, but later I understood that the wallet address given by the exchange is actually controlled by them. So whenever we deposit there, the bitcoin is already under their control and our balance is only recorded in their database.

They are the only ones who know how that balance is accounted for internally, and they can also transfer those coins to another address they own. So when we withdraw, the bitcoin we receive does not necessarily come from the same wallet where we deposited. It can come from another wallet controlled by the exchange, since internally our balance is basically just an account record.

This explains something further that we can track how it got deposited, but once the exchanges take control after it has being deposited, it becomes way harder to actually track it. Because the exchanges are the once now doing that for you. This further explains why you are not in control of your coins in an exchange you don't control. That's why controlling your won coins makes you see when and where your coins are actually going. Without depending on someone to actually do it for you.

[Charles-Tim]

So in a situation were your exchange account is being hacked or frozen, does blockchain know you own source balance ?

The exchanges will know your balance, but the problem is if the exchange will be able to give you your coins after the breach.

Have you for once tried to trace your exchange balance on-chain abd you got lost ? What was the shock the first time you understand this ?

It is not hard to trace your coins sent to an exchange, but the coins will probably not be the one that you will withdraw on the exchange because the coins on the exchange belongs to the exchange on the blockchain.

[Pearl_20]

This is actually the part where it confused me before, but later I understood that the wallet address given by the exchange is actually controlled by them. So whenever we deposit there, the bitcoin is already under their control and our balance is only recorded in their database.

They are the only ones who know how that balance is accounted for internally, and they can also transfer those coins to another address they own. So when we withdraw, the bitcoin we receive does not necessarily come from the same wallet where we deposited. It can come from another wallet controlled by the exchange, since internally our balance is basically just an account record.

There was a time i was keeping my bitcoins on exchange, Binance precisely. Each time i make a deposit i will log in and check if it has reflected in my balance but it got to a time when i became tired of always logging in to check my balance so instead i decided to be tracking my balance on blockchain but to my greatest surprise i saw that each time i send bitcoins it will show as received in the blockchain and almost within same time it will be sent out and the worst part was that my balance was showing nothing in the blockchain, i almost got heart attack as my heart was pacing so i logged in to my Binance and saw that my balance was intact, that was how i became calm but later on i started moving the coins to a self-custody wallet and my balance and every transaction i made was recorded correctly on the blockchain. Funny enough i didn't even figure out what happened in the blockchain when my coins were still in the exchange until today that i came across this thread.

[Sammysmart001]

So in a situation were your exchange account is being hacked or frozen, does blockchain know you own source balance ?

The exchanges will know your balance, but the problem is if the exchange will be able to give you your coins after the breach.

Have you for once tried to trace your exchange balance on-chain abd you got lost ? What was the shock the first time you understand this ?

It is not hard to trace your coins sent to an exchange, but the coins will probably not be the one that you will withdraw on the exchange because the coins on the exchange belongs to the exchange on the blockchain.

Good clarification Charles Tim, this the very part that can get most of our beginners confuse. This because they may assume that the same BTC which they deposit will be exact same BTC they will receive if they withdraw.

Not knowing that once you deposit your exchange control the coins and also manages the account internally, In our account what we see is our balance with the exchange not UTXO which carry’s our name. That why is important we understand different between exchange larger and Bitcoin block chain.

[Livingleged]

They are the only ones who know how that balance is accounted for internally, and they can also transfer those coins to another address they own. So when we withdraw, the bitcoin we receive does not necessarily come from the same wallet where we deposited. It can come from another wallet controlled by the exchange, since internally our balance is basically just an account record.

Similarly to what happens in the conventional banks when you deposit money in the bank, they don’t keep your money separately, they only record that this account holder deposit so so amount and then the money you brought will be mixed with other transactions and anytime you want to make withdrawal you’ll be given the exact amount you requested so long as it’s within the range of your account balance. That’s exactly what happens with the exchange, every other transaction on the bitcoin network is handled by the exchanges.

[Dr.Bitcoin_Strange]

I don't bother myself to track transaction using an exchange BTC address because it's not usually clear for me like when am tracking transactions on my self custody wallet address. Last time I did that, I discovered so many transactions on that exchange address which I was not the one that have done all those transactions but that was understood because it's the exchange that is managing the address on behalf of the account owner. Based on the question you asked, the exchange already knows the balance in each user's account so if the exchange get attacked and user's lost their coins, the exchange knows the balance of every victim and will return it if at all they are not going to fill for bankruptcy after that attack.

[Questat]

They are the only ones who know how that balance is accounted for internally, and they can also transfer those coins to another address they own. So when we withdraw, the bitcoin we receive does not necessarily come from the same wallet where we deposited. It can come from another wallet controlled by the exchange, since internally our balance is basically just an account record.

Similarly to what happens in the conventional banks when you deposit money in the bank, they don’t keep your money separately, they only record that this account holder deposit so so amount and then the money you brought will be mixed with other transactions and anytime you want to make withdrawal you’ll be given the exact amount you requested so long as it’s within the range of your account balance. That’s exactly what happens with the exchange, every other transaction on the bitcoin network is handled by the exchanges.

Yeah, that's it, the only difference is when you deposit money to a bank, it doesn't go through the blockchain, that first transaction is already recorded internally by the bank.

With exchanges, you can usually check your deposit on the blockchain and that record can stay there permanently as proof of the transaction. With banks, you may have a passbook or an online balance, but everything is still recorded inside their own system, so I think it's still a bit harder to use that alone as proof of ownership.

[Donneski]

The day I learnt about this was the day I took the *not your key, not your coins" slogan more serious. Let me adopt your instance, we often overlook the fact that the Blockchain is unaware how much much Sammy owns on his Binance account. It's only aware about addresses, transactions, inputs and outputs. So the connection between my exchange account and a particular amount of BTC is entirely managed by the exchange's database

So whenever two users I'm the same exchange move coins or will I say move balances, the blockchain is never informed of the transaction so it doesn't record the trade, it's the exchange through their database that internally update both balances.

What I found interesting about this the day I learnt it is that when I decide to withdraw my coins from the exchange, it broadcasts broadcasts the transaction for the blockchain to record the movement of those coins. That was what made me get a clearer understanding of the whole “exchange balance vs on-chain balance”

[SamReomo]

Have you for once tried to trace your exchange balance on-chain abd you got lost ? What was the shock the first time you understand this ?

I have never tried to trace that and I will never even think about it. Depositing your Bitcoin or any cryptocurrency on an exchange means you're already taking the risk to make profit from off-chain trading and I fully understand that. That's the reason why I've deposited funds to my trading account and I'll keep using it as I don't really need to know anything about the balance on chain because I always need to convert it to stable coins after taking the profit so it doesn't matter at all for me to trace the balance.

[freedomgo]

What I found interesting about this the day I learnt it is that when I decide to withdraw my coins from the exchange, it broadcasts broadcasts the transaction for the blockchain to record the movement of those coins. That was what made me get a clearer understanding of the whole “exchange balance vs on-chain balance”

You can follow the wallet explorer, blockchain and other tools to understand how the coins are moving, there are also blockchain analysis tools that can help you see where the coins are going.

But once the Bitcoin goes into an exchange, you can usually only track it up to that destination, after that it becomes more difficult from our side because the exchange handles the movements internally.

It's not really that hard to understand, it's just basic knowledge that I think anyone investing or trading Bitcoin should know.

[Donneski]

What I found interesting about this the day I learnt it is that when I decide to withdraw my coins from the exchange, it broadcasts broadcasts the transaction for the blockchain to record the movement of those coins. That was what made me get a clearer understanding of the whole “exchange balance vs on-chain balance”

You can follow the wallet explorer, blockchain and other tools to understand how the coins are moving, there are also blockchain analysis tools that can help you see where the coins are going.

But once the Bitcoin goes into an exchange, you can usually only track it up to that destination, after that it becomes more difficult from our side because the exchange handles the movements internally.

It's not really that hard to understand, it's just basic knowledge that I think anyone investing or trading Bitcoin should know.

Thank you for the suggestions on how to better track transactions on the blockchain.

But the experience I shared was when I was a newbie not now, I know better now and is very much aware of almost everything you said in your response, however, I still needed to acknowledge your effort to help me as well as clarify you that I've grown past that stage.

[KiaKia]

Every exchanges wallet addresses belongs to the exchange, they have the control over every users funds and it's why it's not safe to leave your coins on any exchanges.

Most people don't see FTX collapse coming, and many people still haven't recovered from that one single Centralised exchange collapse till today, exchange deposits are traceable, public on the Blockchain but its no longer under your control.

I really still wish that Dexs are as popular as centralised exchanges, even the peer to peer we have aren't all true peer to peer, most of them are centralised exchanges offering fake P2P service.

[Natalim]

What can you really see on the blockchain?

Basically, you can see the wallet address, where the funds were sent, the destination wallet address and the transaction itself. That's the kind of information that is publicly visible. With exchanges, their wallets can also be audited or tracked, but they usually have a lot of addresses and a huge number of transactions. So unless you have full access to their internal records, you cannot really know exactly how all those coins are moving inside the exchange.

People say the blockchain is transparent, and that's true, but only to a certain extent. It's most useful when the wallet addresses are already known and you know who or what those addresses belong to.

[snowpega]

...
This is why not your keys not your coins is more than a slogan.
...

In this matter, this line is more than enough to understand the risk involved in holding your major funds on any centralized crypto exchange. Because whatever you are seeing in your portfolio, those are just numbers, not the real amount. Why is that so? Because you don't have your keys; your funds are in third-party custody. What if, at any time, the exchange shuts down its service without notifying anyone about it? You will lose all your money at that time. This is why it is always advisable to hold your major or long-term funds in self-custodial wallets for better security. (DYOR!) So, in case, you are a trader, you can use exchanges just to hold money only for the short term. By the way, you can also shift to DEX decentralized exchnages as a better option. DYOR!