This is what they don’t tell you about centralized exchanges and why you need to withdraw your Crypto NOW
This can be good, bad, and downright ugly!
To the newly initiated in the crypto space, you may believe that when you use a centralized exchange (CEX) like Binance or Kucoin, the crypto that you buy will be stored nice and cozy in a separate wallet on the exchange?This is not the case and let me explain why this is important to know When you buy crypto on an exchange, whether it’s BTC or one of the 1000s of altcoins, your balance is more like an IOU from the exchange and If you want to withdraw i they’ll send it from their central reserve to the wallet you choose.
This can be good, bad, and downright ugly!
Crypto exchanges are gambling your money away
THE GOOD: If crypto was sent from 1 wallet to another every time a client made an exchange, this would result in super high fees to pay for the on-chain transaction costs On a CEX you won’t pay gas fees to exchange tokens. Move to an eth DEX like Uniswap & you’ll be hit with gas fees enough to make you shudder. A CEX usually does on-chain transactions upon depositing and withdrawing crypto Trading is off-chain; the exchange takes care of it against reserves. Ergo CEXs have very low trading fees (great! Every loves cheap fees).
THE BAD: Crypto is big business and so those savvy folks at CEXs were quick to cotton onto the fact that clients do not actually withdraw their crypto all that often As a result, this means that exchanges can sell massively more crypto than they have in their wallets as long as the exchange has enough crypto at its disposal to allow their clients, who want to withdraw, do so, then all is good (at least for the unscrupulous exchange). The exchanges are literally coining it in, but at your expense the exchange is naked shorting HOLD UP WHAT DOES NAKED SHORTING MEAN? Naked short selling is naughty short-selling of assets that have neither been borrowed nor located In simple terms, an exchange themselves may decide to go on their books and sell coins they don’t have (i.e. all those coins that their clients have deposited) The result is the price suppression of the asset you hold!
THE DOWNRIGHT UGLY: What happens when a CEX runs out of crypto? Maybe it’s your favorite crypto KDA or maybe FLUX Then ‘POW’ withdrawals have mysteriously been disabled, not just for a day… but for an extended period. Watch out for phrases like ‘wallet upgrade’, ‘network congestion’ or ‘wallet maintenance’ This disabling of withdrawals may conveniently occur when it benefits the exchange the most.
Let’s take John, for example, (for full disclosure John isn’t real but if he were he’d be lying beaten and bruised on the side of the great crypto highway) John buys KDA for $10. The price is crashing and his exchange has disabled KDA withdrawals for quite some time now and John is understandably frustrated, not only due to the price action but by the fact he can’t withdraw his tokens. Beaten, bruised and deflated he sells at a much lower price and the exchange pockets the difference. These exchanges hang Johns out to dry without a second thought.
THE SOLUTION: There’s a couple of options 1) Withdraw your coins right after you buy them. This puts pressure on CEXs to not trade against their clients: the old not your keys, not your coins principle. 2) Choose an exchange that stands for the right thing in crypto, the very reason we all came into the space, ne that does not trade against their clients; that doesn’t disable withdrawals; that doesn’t stop their client’s trade in volatile periods due to ‘network congestion’; that helps their clients make money
