Just when Bitcoin and the entire cryptocurrency market was getting some bullish legs back, fear has knocked the bull to its knees. Overnight, the largest crypto exchange in Korea, Upbit, was raided by prosecutors for suspicion of fraud.
South Korean authorities suspect that Upbit has been selling cryptocurrency to customers that it doesn’t actually own. This suspicion is widespread among savvy market participants, who believe that many of the big crypto exchanges are operating a form of fractional reserve trading, and allowing market participants to “sell short” crypto currencies that have not been deposited on the exchange. Market participants engaged in selling short merely deposit fiat currency which is used to initiate the trade.
If so, the question would be what does the person on the other side of the trade actually buy? It would appear that what is purchased isn’t actually a digital currency, but rather a ledger entry of the exchange which amounts to a promise to deliver said crypto currency.
All goes unnoticed until there are more requests to withdraw said crypto currency than are actually held by the exchange. That is the point that the exchange risks failure. As long as buyers don’t attempt to withdraw their digital coins and tokens, and leave them on the exchange, the situation of short sellers being able to sell more of a crypto currency than is actually available for sale will cause nothing more than an artificially low price.
However, if the buyers do attempt to withdraw in this situation, it could cause the failure of the exchange, which could include people losing their entire investment.
It is for this reason – and others – that many veterans in the cryptosphere repeat the mantra: Never leave your coins and tokens on an exchange. Always withdraw them into your own wallet.
As the gold bugs are fond of saying, “If you don’t hold it, you don’t own it.”