The cost of bitcoin (BTC) has dropped once further in the wake of FTX, one of the biggest cryptocurrency exchanges in the world, declaring bankruptcy. It is currently at $16,500, a far cry from the record-breaking $66,000 it reached only a year ago.
Why has there been such a significant reduction in value? It’s due to the highly toxic combination of Binance, a stablecoin (a cryptocurrency whose price is fixed 1:1 to the US dollar or another “fiat” currency), and trained professional traders running high-frequency algorithms.
Unlike stocks, bitcoin can be traded on a variety of exchanges, but because Binance controls more than 50% of the cryptocurrency market, it has the power to influence price movements for bitcoin and other cryptocurrencies. A stablecoin-like tether must be converted from fiat currency by traders before they may purchase cryptocurrencies. Since one dollar typically equals one tether, trading on bitcoin-tether determines the dollar price of bitcoin because it has by far the highest volume of all items on Binance. However, the entire crypto economy collapses along with bitcoin.
The problem is that Binance is solely self-regulatory, which means that it is not at all subject to oversight by conventional market regulators like the Securities Exchange Commission in the US or the Financial Conduct Authority in the UK. Because professional traders may utilise high-frequency price-manipulation algorithms on Binance, which are illegal in regulated markets, this is a huge draw for them. These algorithms can result in significant price swings, which makes bitcoin quite erratic.
Like all other self-regulated cryptocurrency exchanges, Binance handles its own trade clearing and settlement. As a result, losing counterparties—those who are on the receiving end of lucrative trades—often see their positions immediately and abruptly eliminated.
Self-regulated cryptocurrency exchanges, unlike traditional exchanges, are not required to issue a warning when a trade has lost so much money that further collateral is needed in the account. Instead, traders are completely in charge of funding their accounts through constant attention to a factor known as the liquidation price. The algorithms employed by expert traders perform this automatically, but it is taxing for regular players like you and me since we have to be extremely alert whenever manipulation is used to generate the volatility that professional traders utilize to boost their earnings.
Toxic flow refers to skilled traders competing against one another since, if their algorithms are equally quick and efficient, the likelihood of profit is more or less 50/50. Professional traders much prefer dealing with regular investors as counterparties.
Binance has been incredibly effective at luring regular investors, so this is concerning. Its extremely quick expansion was made possible by the fees it receives from this type of investment, and it is currently expanding with its own stablecoin, blockchain, and NFT marketplace. Following a very successful business model, Binance is solidifying its position as the Amazon of the cryptocurrency world.
The current state of the cryptocurrency markets can be compared in some ways to the 2001–2002 dotcom bubble implosion. As many businesses filed for bankruptcy, the venture funding that had flooded into internet firms in 1999–2000 abruptly dried up. As the price of bitcoin fell this year as a result of some unexpected and shocking attacks on a brand-new stablecoin called Terra, major crypto-lending companies Celsius and Voyager also declared bankruptcy. Three Arrows Capital, one of the biggest cryptocurrency hedge funds, also defaulted on its loans. Since FTX filed for bankruptcy, consumers are unable to withdraw their money from Genesis, many other lending platforms (shadow banks), Gemini, and other exchanges.
Now that venture finance has dried up in the cryptocurrency business, we’ll see a lot more of this contagion, leading to widespread startup bankruptcy. There will be more exchanges and loan platforms that fail, along with blockchains, NFT marketplaces, data aggregators, and analytics firms.
From this mayhem, Binance might be able to establish a monopoly. But at the moment, this non-domiciled and self-regulated organisation still depends on fee income from regular investors and on market makers (professional traders similar to unfriendly exchange stallholders) to run its operations.
The risk is that because everyone is currently extremely anxious, inflating the price of bitcoin once more is the only way to attract regular investors. People would be tempted to return to the cryptocurrency market as a result, only to have their funds destroyed as the cycle of instability continued.