The 620,000 Bitcoin That Lived Only in the Ledger
In February 2026 the Korean exchange Bithumb credited 620,000 BTC to customer accounts while holding about 42,000. Starting from the fact that an exchange balance is a number in a ledger, this covers what proof of reserves can and cannot show about whether an exchange really holds your coins, and how far Korean regulation has come.
At 7 p.m. on February 6, 2026, the Korean exchange Bithumb paid out prizes from a "random box" promotion. Each of the 249 winners was due somewhere between 2,000 and 50,000 won, a few dollars at most. The employee entering the payout set the unit to BTC instead of won. A total of 620,000 BTC landed in 249 accounts.
At that moment Bithumb held 42,619 bitcoin on behalf of customers and 175 of its own, a little over 42,000 in all. The number paid out was about fifteen times what the exchange actually had, and close to 3% of the 21 million that will ever exist. Some winners sold at once. The bitcoin price inside Bithumb fell from around 98 million won to a low of 81.11 million won and recovered within about five minutes. Bithumb later said it had recovered 99.7% of the coins, with about 125 BTC still outstanding.
Five days later, at an emergency session of the National Assembly's Political Affairs Committee, a lawmaker asked whether, in theory, 10 million BTC could have been paid out as well. Bithumb's chief executive answered that in theory, yes.
An exchange balance is a number
The reason this could happen is simple. The bitcoin in an exchange account is not on the blockchain. It is a number written in the exchange's database. When customers trade with each other, no coins move; only the numbers in the ledger change. Real coins move on the blockchain only when a customer withdraws.
So the ledger can record coins the wallet does not have. Changing one number, by mistake or on purpose, is enough. Whether the ledger and the wallets agree is something you only learn when someone compares them, a process called balance reconciliation. At the same hearing another lawmaker pointed out that Upbit and others reconciled every five minutes, while Bithumb did it once a day. The 620,000 coins appeared and disappeared inside that one day.
The same thing can happen in the other direction. At the October 2023 criminal trial of FTX's founder, co-founder Gary Wang testified that the FTX account of the affiliated trading firm Alameda Research carried a secret "allow negative" setting, which let it trade and withdraw even when its balance went below zero. He said the account's line of credit was 65 billion dollars. If Bithumb's accident added coins to the ledger that were not in the wallet, this setting let coins leave the ledger without being there. Either way, the numbers in the ledger and the coins in the wallets come apart. When FTX filed for bankruptcy on November 11, 2022, the gap ran to billions of dollars.
The idea of proof of reserves
Discussion of checking from the outside whether an exchange really holds the coins it owes began in 2013, and the idea came into practical use after Mt. Gox collapsed in February 2014. On March 24 of that year Kraken announced the result of an audit performed by Bitcoin developer Stefan Thomas, confirming that the bitcoin Kraken held exceeded the total of customer balances. The method was a variation of a Merkle tree audit proposed by Greg Maxwell, and each customer could check for themselves that their balance had been counted. Kraken added that this was only a first step toward more publicly verifiable accounting.
Proof of reserves has two halves. One is the asset side: proof that the exchange controls this many coins. The other is the liability side: proof that the exchange owes customers this much. It means something only when assets are greater than or equal to liabilities. Either half alone says nothing.
The asset side is shown with signatures
Control of coins is relatively easy to show. Move the coins at a pre-agreed time, or, without moving them, sign a statement with the key for that address. Showing ownership with a signature is covered in Proof of Ownership Without Moving a Coin.
When there are thousands of addresses, as at an exchange, it is better to bundle them than to sign for each one. BIP-127, assigned its number in January 2019, describes how. You build a single proof transaction, but in place of a real coin its first input carries the SHA-256 hash of the proof statement. A transaction with such an input can never be valid, so even if broadcast it will not enter a block. The remaining inputs hold all of the exchange's real coins, and they are signed. The verifier checks that the signatures are correct and that those coins are still unspent. The transaction to be signed is passed around as a PSBT, and a dedicated field was added to carry the proof statement. The document itself notes that the method has known shortcomings, mostly around privacy, and that it only formalizes a method already in use.
The weakness on this side is timing. A signature says only that someone held the key at that moment. An exchange can borrow coins on the day of the proof, sign, and return them the next day, and the proof still holds. In a November 2022 post Vitalik Buterin wrote that exchanges shuttling collateral back and forth between each other to take turns doing proof of reserves could look solvent when they are not. The same coins end up in two exchanges' proofs.
The liability side is shown with a Merkle sum tree
The hard side is liabilities. An exchange can announce the total of customer balances, but there is no way to know whether it left some customers out of the sum. Maxwell's method hands that problem to the customers themselves.
Build a Merkle tree with one customer's balance in each leaf. Unlike an ordinary Merkle tree, each node carries an amount alongside the hash, and the amount in a node is the sum of the two nodes below it. This is called a Merkle sum tree. The amount at the root is the total of all customer balances. The exchange publishes the root, and each customer receives the path from their own leaf up to the root and does the arithmetic. If their balance is missing or reduced, the numbers do not add up. Even if only some customers check, the exchange cannot know which ones will, so it cannot safely drop any account.
There is a reason the amounts must be included. With hashes alone, the exchange could create one fake account with a balance of minus 500 BTC and shrink the total. In a sum tree that negative amount shows up directly in the node above it, and the customer in the neighboring leaf sees a strange number the moment they check their path. A negative number hidden in the ledger is exactly what FTX's allow negative setting created.
Binance published a Merkle tree proof of reserves in November 2022, the month FTX fell. The first version put only the hash of balances in the leaves, so the root did not guarantee the total, and critics noted that an account with a negative balance could be slipped in. In February 2023 Binance added a zero-knowledge proof (zk-SNARK) that every leaf is included in the announced total and that no account with a negative net balance exists, without revealing individual balances.
What the proof cannot show
An exchange that has gone through proof of reserves still cannot prove several things.
Liabilities outside the ledger. The sum tree covers customer balances only. Money the exchange has borrowed elsewhere, coins pledged as collateral, and amounts owed in lawsuits are not in the tree. Assets can look larger than customer balances and still fall short once the other debts are added.
Timing. A proof is a snapshot of one moment. It says nothing about what happens the next day. Bithumb's 620,000 coins came and went within a day.
Fiat. Cash deposits are not on a blockchain, so they cannot be shown with a signature. In the end you have to trust a bank or an accounting firm.
The nature of the check. On December 16, 2022, the accounting firm Mazars stopped work on proof of reserves reports for Binance, Crypto.com and KuCoin, citing concerns about the way the public understood those reports. They were not audit opinions but the results of agreed-upon procedures performed at a historical point in time. Many people read them as audits.
How far Korean regulation has come
Korea's Virtual Asset User Protection Act, in force since July 19, 2024, requires customers' won deposits to be held by a bank and at least 80% of the economic value of customers' virtual assets to be kept in cold wallets cut off from the internet. At least 5% of the value held in hot wallets must be covered by insurance or a reserve. Exchanges have disclosed each quarter the ratio of what they actually hold to what customers have deposited, and Upbit has published accounting firms' inspection reports since June 2018.
After the Bithumb accident, regulators inspected the five largest exchanges. Three of the five were reconciling their ledgers against their wallets once a day. On April 6, 2026, the Financial Services Commission announced that every exchange must build a system that reconciles balances every five minutes, with a threshold at which trading stops automatically if the ledger and actual balances diverge too far. High-risk transactions such as promotional payouts will need multiple approvals and third-party cross-checks, and disclosures will widen from the holding ratio to the quantity held for each asset. The commission said it would put these measures into the second-phase virtual asset law to give them legal force.
The direction is clear. Still, these are controls inside the exchange and supervision by the authorities. They are not a structure in which customers check for themselves that their balance was counted. Even with reconciliation every five minutes, the people who see the result are the exchange and the regulator.
What you can check
If you keep coins on an exchange, look at whether it publishes a proof of reserves and, if so, whether you can confirm from your own account that your balance is included. Look at the date of the proof, whether the asset side discloses addresses, and whether the liability side has a safeguard against negative accounts. And remember that the proof says nothing about debts outside the ledger or about what happens the next day.
The number in an exchange ledger is the exchange's promise to give you that much back. The moment the total of those promises exceeds what it actually holds, an exchange holding bitcoin has the same structure as a fractional reserve bank. Proof of reserves is a way to look in from the outside and see whether the promise can be kept. There is only one way to turn the promise into coins: withdraw to your own wallet. Once that withdrawal is recorded on the blockchain, there is nothing left to prove.