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

[BlackHatCoiner]

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

Nope. It is only a centralized SQL database that knows it!

The real shock is when you finally decide to self-custody, hit 'Withdraw', and get slapped with a "Withdrawals temporarily suspended due to wallet maintenance" in the middle of a bull run. This is when you truly understand what Bitcoin is about!

[Zaguru12]

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.

This is aptly put, do you know this point to one of the key questions usually asked by newbies which is when people ask about which place they should actually store their coins on. If you notice on the blockchain once your bitcoin arrives later that address is actually empty even if you have bitcoin on that exchange, this is because the bitcoin is first moved to a hot wallet (non-custodial wallet) controlled by the exchange and then to a cold wallet wallet for that exchange. And this even how you know if an address is owned by exchange and which exchange.

This tells you something which is that this exchanges also themselves do not trust hot wallet which are even self custody than to even trust a third party like those who do to exchanges when they store there bitcoin there.

[PX-Z]

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 ?

I once tried tracking an exchange's address on the blockchain, but the moment i understood how exchange wallets and their internal transaction system actually work, i stopped doing it, it's a waste of time lol.

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

Your exchange balance is an entry in the exchange's internal ledger (database). If they freeze or hack your account, bitcoin doesn't magically step in and say, "Actually, those coins belong to Sammysmart001."

[OcTradism]

I once tried tracking an exchange's address on the blockchain, but the moment i understood how exchange wallets and their internal transaction system actually work, i stopped doing it, it's a waste of time lol.

Before appearance of Arkham Intelligence, you can use this site https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html but clearly with Arkham Intelligence, they already have public information that can be used for you more easily and with more insights too.

With people who are not technical, and only normal users of Bitcoin blockchain or altcoin blockchain, they don't have to spend time to look at these things. With long term investors, they can simply enjoy their life after buying, and holding bitcoins for market to turn to bullish and bring profit to their portfolios.

https://arkm.com/

[BitBakerr1]

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.

I believe anyone that is in this forum knows about this already, except those ones that are new in this forum.
We have a lot of thread that talks about the reason why keeping your bitcoin in an exchange is not safe.

Funny enough I still believe a lot of people that has known about this are still holding there bitcoin in an exchange because they feel is more convenient for them.
I have seen a thread where someone complained about an exchange shutting down and he lost his bitcoin and this member is already a full member in this forum, this made me believe that we still have people that use exchange to hold their bitcoin even after all the warnings they received in this forum.

[Cossyblack]

I believe anyone that is in this forum knows about this already, except those ones that are new in this forum.
We have a lot of thread that talks about the reason why keeping your bitcoin in an exchange is not safe.

Funny enough I still believe a lot of people that has known about this are still holding there bitcoin in an exchange because they feel is more convenient for them.
I have seen a thread where someone complained about an exchange shutting down and he lost his bitcoin and this member is already a full member in this forum, this made me believe that we still have people that use exchange to hold their bitcoin even after all the warnings they received in this forum.

you can't blame people because it isn't everyone that knows about the risk of saving their bitcoin in an exchange. For sure,they might still be people who are using centralise exchange to store their bitcoin assets probably because they have no idea of the risk that they could lose their bitcoin forever if the exchange got hacked or bankrupt. Several centralised exchanges have been hacked in the past and most of them didn't refund back their clients assets. So it is a big risk to use any centralise exchange to hold your bitcoin instead you can use them to buy bitcoin and then you can transfer your bitcoin to your non custodial wallet.

[Ahli38]

Exchanges typically practice commingling or even commingling funds for custodial storage. They also record internal transactions off-chain so each user’s privacy is known only to those exchanges. And that is what makes it difficult for you to track custodial wallets held by exchanges. Perhaps no one can see the transactions on exchanges except those with the authority to manage them or even intruders capable of breaching their systems. But I personally believe that every exchange should protect its reputation by backing up data to avoid issues related to those transactions. On the other hand exchanges that provide proof of reserves should also demonstrate transparency regarding the assets they hold on behalf of their users. In any case self-custody storing Bitcoin in a non-custodial wallet is far more important than keeping it in a custodial wallet for your freedom.

[MisFoxie]

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 ?

Yes, I tried to track the Bitcoin from my exchange, then I realized that they actually move those Bitcoins to their hot wallet. After that I didn’t try to track what they do with the Bitcoin. And when we withdraw they sent fund from their hot wallet to that specific address.

When we send funds to the exchange’s Bitcoin deposit address, which is under their control we basically deposit the Bitcoin to the exchange and sell it for free. But for the Bitcoin that remains in their wallet they have to pay a 10 to 20 cent fee to send it, which I think when we or other users withdraw that Bitcoin, they charge an additional fee. For example if the average Bitcoin fee is 20 cents they may charge one or two dollars through which we can say that the exchange has no loss.

[DanWalker]

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 ?

Yes, you are right, displaying 0.05 BTC on exchange does not mean I have 0.05 BTC individually on blockchain. It functions just like our traditional bank. Showing the digit on our account does not mean that bank can pay everyone’s liabilities together.

So most gripping part here is Proof of Reserve. Today, if any exchange want they could use Merkle tree or zk proof. It can indicate that my account balance is included in their registered liabilities. And that they have corresponding on-chain reserve. As far as I know, Binance’s existing PoR implementation has such kind of verification. But PoR does not totally eliminate custody hazard. It is only point in time reserve evidence. Also PoR itself cannot always catch thing like undisclosed liabilities.

[ZAINmalik75]

So unless you have full access to their internal records, you cannot really know exactly how all those coins are moving inside the exchange.

There are no coins moving inside an exchange; it's all just data being shown, and that is how centralized platforms and services work. There are databases that contains all the data and records, and the exchange only uses that data to show everything on the platform. When your exchange balance shows that you have 2 Bitcoins, it doesn't mean that there is a separate wallet for you that has 2 Bitcoins, and when you sell 1 Bitcoin, they transfer 1 Bitcoin from your wallet to the wallet of the buyer, that's not how it works. The balances and funds are all kept in their cold wallets, whatever users deposit are stored there, and balances only move when we make a withdrawal.

If I create an exchange platform, I control the code, the databases, and everything else, which means that even if I don't have a wallet containing 1,000 bitcoins, but I can still show on my exchange wallet that I hold 1,000 bitcoins, because I can literally feed anything into the database or the source code, and it will be shown there. So, whatever we see on centralized websites and platforms, it is all just code and data being shown, balances are just kept in wallets and moved when there are withdrawals which means funds are going out of the platform, and anything that is done internally is just done through data.

[Ojima-ojo]

Can someone with your exchange wallet address, see the total 0.05 bitcoin you hold in your wallet, or your entire wallet balance, the answer is yes, what you don't have is control if the exchange decides to move or not move you money when you want to transfer it, this is the difference between exchange wallet and your custodial wallet.


On transactions history, only those you shared the transaction code to can see the movement, and this is also limited, and available on demand by both parties from the exchange, you see the off chain history thing unlike custodial wallet where everything is publicly available on the public Blockchain ledger.

[noorman0]

-snip-
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.

But this was done under the exchange's instructions, right? Actually, that isn't the way to prove Bitcoin ownership for a different address. Signing a message only proves that you have control over the address itself. For businesses managing millions of dollars, they don't place their trust quite so simply.