Why is buying actual Bitcoin important? It's simple

Buying off an exchange with no intentions to withdraw actual Bitcoin means that whoever you gave money for "bitcoin" doesn't even have to own any to back up your purchases.

You are basically giving them a free loan with nothing in return but a digital readout on your screen that they may or may not honor for fiat at a later date. They have no obligation to give you anything because BTC is not regulated or insured in any way.

The worst part about doing this is that you are willingly suppressing the price of the same asset you are investing in. Buying on an exchange does NOT move the price upwards or lower the liquid supply of BTC at all. Basically wasting bullets that could be pushing the price up in a meaningful way, hence yielding more returns for all involved.

Basically, if everyone bought Bitcoin from exchanges and never actually withdrew it, then BTC price could effectively stagnate, perpetually, in the hypothetical scenario.