When you purchase Bitcoin from a centralized exchange, you never know whether your account is credited with actual Bitcoin or paper Bitcoin. Paper Bitcoin is a “I owe you” Bitcoin, implying that the exchange owes you a certain amount of Bitcoin. The only way to ensure that the Bitcoin you purchased is genuine is to withdraw it to a self-storage wallet or sell it for another asset or product.

To save on transaction fees, most exchanges will not create a separate wallet for your account and transfer your Bitcoin to that address. The Bitcoin balance displayed on your centralized exchange account is a number next to your name on a spreadsheet. This explains why, despite Bitcoin’s 10-minute block time, exchanges can instantly transfer Bitcoin to your account. That is, the time it takes to transfer Bitcoin from one address to another.

Exchanges keep their Bitcoin in a wallet or set of wallets where they possess the private keys and store safely. If they transferred small amounts to your exchange wallets every time you buy and sell within the ecosystem, they would lose a lot of money from the transaction fees.

The vast majority of major exchanges do not provide proof of customer deposits. However, some small exchanges, such as Luno, are audited on a quarterly basis, and…