After the controversial fall of the digital currency exchange “FTX”, investors’ confidence in the digital currency space was greatly damaged. For some time now, there have been reports and of course rumors about the withdrawal of an unusual amount of capital from the Binance exchange, and digital currency investors as well as other financial markets have become increasingly worried about the future of this trading platform.
The recent controversial Binance report, which was published with the aim of proving the exchange’s reserves and reassuring customers, on the contrary, increased the speculations about Binance’s possible financial problems. The opinion of some users was that the assets of Binance customers are not guaranteed 100% or one-to-one and this exchange does not have the necessary financial support. That is, according to some people, if Binance is faced with the withdrawal of its users on a large scale, it may not be able to refund all the requests.
On the other side of the story, the price of Bitcoin has grown by 73 thousand percent since 2012 (December 2022). Although this digital currency operates independently of all centralized entities, the consequences of the collapse of these centralized institutions can affect its price.
The article you read below is a translation a note From Shane Neagle, editor of The Tokenist website. In this note, Nigel has answered the question of what consequences the collapse of the large group Binance could have for Bitcoin.
Controversy over Binance reserves
Binance exchange recently hired the famous Mazars audit firm, which has a history of working with companies owned by Donald Trump, to prepare an audit report for its collection. In this case, the focus was on those assets of users that are in the custody of Binance. Binance has announced several times before, including on December 13th, that it has more capital in its treasury than is needed to cover and repay users’ funds.
However, the situation did not go as expected and the Mazars audit report was not well received by the users. Some Twitter activists called this report fake and claimed that Binance has pledged only 97% of its users’ funds (debts).
John Reed Stark, the former head of the Internet Activities Division at the US Securities and Exchange Commission, said:
The Binance Reserves Proof Report did not mention the impact of the financial developments within this collection, it does not have a clear conclusion, and it did not guarantee the statistics and figures presented. With more than 18 years of experience working at the US Securities and Exchange Commission, I say this is a red flag.
Stark also criticized the hiring of Mazars by Binance and said that Binance should properly prepare its proof of reserves report instead of using the auditing services of a well-known institution.
According to analyst firm Nansen, fears about the financial condition of the Binance exchange led to the withdrawal of a large amount of capital from the exchange, and investors withdrew a total of more than $2 billion from the platform within two days. This figure is the largest single withdrawal from Binance since the bankruptcy of the FTX exchange.
Shortly thereafter, Bynes temporarily halted withdrawals of the USDC stablecoin. Of course, Binance’s explanation was that this withdrawal suspension is due to the token exchange process that it intends to carry out.
The large withdrawals from Binance may be a sign that some traders are willing to migrate to other exchanges or keep them in a more secure environment than the exchange, such as personal wallets. The Reuters news agency, which has been monitoring Binance’s activities for some time, recently published a report on the possibility of Binance and its CEO facing a lawsuit from the US Department of Justice for being involved in money laundering and violating sanctions regulations. Of course, the story between Binance and the US Department of Justice is not something completely new. According to some, the content of this report refers to an old news.
Other digital currency exchanges have also seen significant withdrawals of their users’ funds since the fall of FTX. Meanwhile, the consequences of the collapse of FTX continue and Sam Benkman Freddie, the former CEO of this group, was recently arrested in the Bahamas by American authorities on charges of defrauding investors.
What will happen to Bitcoin?
The publication of the US inflation rate last month made the outlook for risky assets, including digital currencies, somewhat more positive than before. The data confirmed that inflation in the United States is still easing, raising investors’ hopes for a faster return by the central bank from its contractionary monetary policies.
Despite this, the improvement of macro policies in the United States may not have the expected positive effect on Bitcoin and other digital currencies, contrary to expectations; Because the news streams specific to the space of digital currencies continue to damage the confidence of investors in this sector. The wavering of investor confidence and the possibility of Binance facing a crisis can cause quite serious damage to the entire ecosystem of digital currencies.
The price of Bitcoin fell by 20% in November alone, and this fall was clearly due to the FTX incident. In addition, 200 billion dollars of the total value of the digital currency market was lost due to the bankruptcy of this collection. Now it can be imagined that the possible collapse of Binance could affect the market much worse than the FTX affair and have long-term destructive consequences for the world’s digital currency ecosystem.
The possible scenario of the collapse of Binance has two fundamental differences from what we saw in the FTX case. First, investor sentiment towards the market is much worse now than it was before the FTX crash. Second, FTX’s activity was largely concentrated in America, but Binance is truly an international conglomerate. Therefore, any serious crisis in Binance can have a pervasive effect on the market, initiate a new era of capital withdrawal among users, and ultimately lead to the bankruptcy of other collections.
The VanEck Investment Institute has predicted that the price of Bitcoin will be under pressure at the beginning of 2023, and the reason has been cited by miners who are on the verge of bankruptcy.
According to Van Eck experts, Bitcoin can drop to $10,000 in the first quarter of 2023 and reach $30,000 by the end of this year. Matthew Sigel, director of digital asset research at VanEck, says the selling pressure we’re likely to see in the first quarter of 2023 could mark the bottom of the current bear market.
However, this projected recovery to the $30,000 level will only happen if there is no bad news like FTX bankruptcy or a scary scenario like Binance crash.
In praise of private ownership
The collapse of the Celsius lending platform at the beginning of this year caused the loss of $4 billion of users’ capital. Similarly, due to the collapse of the FTX exchange, more than a billion dollars of the assets of the clients of this exchange have been lost. Both of these events highlight the problems of centralized systems; The problems that Bitcoin was created to solve.
Therefore, one of the key takeaways from the FTX saga is the growing need for private (non-trust) ownership in investing in digital assets. Centralized exchanges may provide users with a convenient platform to store digital currencies, but there is no guarantee that they will be able to repay their customers’ assets in an emergency; Crises such as the hacking of the exchange or misuse of user funds by the administrators of the platform itself.
Ray Youssef, CEO of the Paxful exchange, recently encouraged users to keep digital currencies personally and transfer their assets to secure hardware wallets.
From now on, we will send an email to our customers every week with the message that they should not keep their capital in any of the exchanges, including Paxful. This is our way. Take care of your own savings.
Warren Davidson, a member of the US Congress and a representative of the people of Ohio, also mentioned the same issue of personal storage of digital assets in the congressional hearing about the FTX case.
Despite Binance’s resistance that it can still attract new deposits and withdrawals from the exchange are stabilizing, the cryptocurrency community remains concerned about the financial condition of the world’s largest cryptocurrency exchange.
The Binance bankruptcy, though unlikely, would have a much more powerful negative impact on the entire cryptocurrency space; Because Binance has a higher position than FTX in terms of international position and influence. A potential crisis at Binance, just a month after the FTX incident, could spark another mass selloff in the Bitcoin market.
While this scenario is a huge disaster for many, there will likely still be investors who will consider buying more units at lower prices in the chaos.