Tuga eats at the neighbour's house. I know this because she comes home at 6pm entirely uninterested in dinner, wearing the expression of someone who has made other arrangements. The neighbour is kind, reliable, and has fed her for years.

She is also under no obligation whatsoever. If she moves, or gets a dog, or simply stops, there is no notice period and no appeal. Tuga's access to that bowl is not a right. It's a habit that has worked so far.

Every exchange balance you hold is that arrangement. The relationship is usually good. It is never yours.

1. What "Your Balance" Is on an Exchange

When you hold bitcoin on an exchange, you do not hold bitcoin. You hold an entry in that company's database saying they owe you some.

The coins — if they exist as you imagine — sit in the exchange's own wallets, pooled with everyone else's, controlled by their keys. Your balance is an IOU. Withdrawing is the moment that IOU gets tested, and it is the only moment that ever tests it.

This isn't a scandal either. It's how custodial businesses work, and the good ones are careful. The problem is that the interface makes the IOU look identical to ownership, and people plan their lives around the appearance.

2. How the Failure Actually Happens

Exchange collapses follow a recognisable pattern, and it is almost never a dramatic hack.

• Commingling. Customer assets and company assets end up in the same pool. Once mixed, the customer's coins are functionally company property when things get difficult.
• Lending them out. Idle customer coins are an irresistible balance sheet. They get lent to trading desks, deployed for yield, or used as collateral. Now solvency depends on counterparties who have their own problems.
• Owning too much of your own token. The exchange holds a large position in a token it created, marks it at market value, and borrows against it. That value is real only while nobody sells. It is an asset made of confidence, recorded as if it were made of money.
• The run. Something spooks depositors. Withdrawals spike. The assets that were lent out cannot be recalled fast enough, and the self-issued collateral collapses precisely when it's needed. What looked like a liquidity problem on Monday is revealed as insolvency by Thursday.

The insolvency was always there. The run only made everyone look.

3. Proof of Reserves, and Why It's Half a Proof

After the last round of failures, exchanges rushed to publish proof of reserves — cryptographic attestation that they control wallets holding X coins.

It's better than nothing. It is not what people think it is.

Reserves without liabilities prove nothing. Holding 10,000 BTC means very little if you owe customers 15,000. A real proof requires both sides: the assets and a verifiable commitment to the total of what's owed, ideally with a mechanism letting each customer check their own balance is included in the total.

Two things to watch for: attestations that show only reserves, and reserves demonstrated on a single date — coins can be borrowed for the snapshot and returned afterwards. That has happened.

4. The Warning Signs

They repeat, cycle after cycle:

• Withdrawal friction that appears suddenly. New verification steps, "network congestion", maintenance, delays affecting only large amounts. This is the loudest signal there is. Do not wait for it to resolve.
• Yield that has no explanation. If you cannot say specifically who is paying the interest and why, you are the yield.
• A native token doing structural work. Fine as a fee discount. Alarming as collateral.
• Executive noise. Public feuds, aggressive reassurance, mocking of critics. Solvent companies rarely need to insist.
• Opaque jurisdiction and no real audit. "Attestation by a firm you've never heard of" is not an audit.

Any one might be innocent. Two together is a reason to move, and the cost of being wrong about moving is a withdrawal fee.

5. The Practical Rule

An exchange is a bus stop, not a home.

You go there to convert fiat into bitcoin, and then you leave. Money sits there for the minimum time the process requires. Anything you're not actively trading goes to your own custody, where the difference between owning and being owed disappears.

The exceptions are honest ones: an active trader needs balances on the venue, and some people genuinely cannot self-custody safely, in which case a large regulated custodian is a considered choice rather than an accident. What should never happen is coins sitting on an exchange for years by default, because moving them was a task nobody got around to.

The Point

The neighbour has fed Tuga faithfully for years, and I expect she will continue. That expectation is reasonable. It is also not a claim I could enforce, and it costs me nothing to make sure there is food in this house too.

Your exchange is probably fine. Most are, most of the time — which is exactly why people leave everything there, and exactly why the failures take so much with them when they come.

Not your keys, not your coins. The bus stop is not the house. 🐾⚡