Crypto currency exchanges are crashing in numbers. Among the recent ones are FTX, Celsius, Three Arrows Capital (3AC), and Voyager Digital and more will crash before 2022 ends. Therefore, with crypto exchanges crashing in droves, many people are asking: Would the largest crypto exchange, Binance crash too? What becomes of the crypto market if Binance also crashes like other exchanges are crashing? Why are crypto exchanges crashing?
A research journal, coinjournal.net recently published a report showing the number of cryptocurrency exchanges that have crashed during the last eight years.
Its findings revealed that 42% of the crashed crypto platforms vanished without a trace! In fact, as they disappear, they also vanish with people’s funds! And they often leave their users no explanation as to why they shut down.
The data also revealed that only 22% of the crashed crypto exchanges, in the last eight years, shut down because of actual business-related reasons. This means that they just shut down despite the booming markets.
Moreover, the research also revealed that 9% of the trading platforms, shockingly, turned out to be outright big scams and fraudulent businesses!
Acording to coinjournal.net’s report:
“Following 23 exchanges going under in 2018, this number exploded upwards by 252% in 2019, before increasing a further 17% in 2020,”
“Remaining at the same level in 2021, this year there has finally been improvement, with a 55% reduction in failures if the rest of the year follows the first six months.”
The research firm continued saying although 2022 has not ended, about 55% crypto platforms will crash!
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“In regards to the amount simply vanishing into thin air, one could expect this to lower – regulation is still far behind, but it has at least made progress and should make it more difficult for exchanges to vanish without a trace.”
So, when on December 2nd, 2023, users reported that Binance was briefly down, fears again heightened.
But data by Downdetector – a research firm that collects status information and detects problems with corporations and tech platforms – looked into the problem and said the crypto exchange remains fine as against reports that it went down. This, though, is not to say that Binance has never gone down before or that hackers have never attacked the exchange and stolen crypto from people’s wallets before.
Even though Binance has continued to remain formidable in the crypto market as an exchange, the question still remains: What happens if Binance crashes or becomes insolvent? What would become of people whose investments are on the exchange? In fact, will people still invest in cryptocurrencies if trusted exchanges are going down? How formidable is Binance? Do crypto exchanges hold funds for people? Are they operating like banks and should they be doing so? Is Binance ‘hackable?’ How has the crypto exchange maintained being the number one exchange in the world?
Keep in mind that the rise and thriving of crypto exchanges was partly a result of the massive interest that people had in crypto.
Many people began to have more confidence in cryptocurrency market especially because of the impenetrable nature of the technology that crypto runs on – the Blockchain technology.
Therefore, soon and just before 2022, prices of cryptocurrencies went massively bullish as more investors embraced the crypto market.
Consequently, in October, 2021 for instance, the price of the most valued crypto – Bitcoin – went as high as almost $65, 000. According to data by Statista, “Bitcoin (BTC) price again reached an all-time high in 2021, as values exceeded over 65,000 USD in November 2021.”
This bullish trend further ignited much confidence on the crypto ecosystem in the minds of investors. Almost everyone wanted to have a share of their funds in crypto. Investing in crypto became a sure way to future-proof funds and some even held it as their retirement plans. This confidence was even fueled by the belief that crypto currencies were built on the blockchain technology – a system of recording information like financial information – in a way that makes it difficult or impossible to change, hack, or cheat the system.
However, and suddenly too, the touted impenetrability of the blockchain system soon was put to test as many exchanges woke up to discover that hackers had gained access and stolen people’s funds. Also, this followed the booming cryptocurrency prices which started plummeting, even to a disastrous level in 2022.
For instance, On 7 May 2019, Binance revealed that it had been the victim of a “large scale security breach” in which hackers had stolen 7,000 Bitcoin worth around U.S.$40 million at the time.
Binance CEO Changpeng Zhao said the hackers “used a variety of techniques, including phishing, viruses and other attacks” and structured their transaction “in a way that passed our existing security checks.”
Although proponents continued the gospel of the blockchain system being impenetrable, some people soon came to have more doubts.
Meanwhile, as the world began to witness a massive and continuous #cryptocrash, soon enough, companies that held people’s money in forms of crypto – Crypto exchanges – began pulling stunts which were only ever pulled by banks in the 1920s – they began halting and limiting crypto withdrawals and damning investors. So, if you, as an investor, wanted to withdraw your coins, your exchange says no! Others just vanished with peoples funds.
Some of such exchanges that pulled this stunt of halting withdrawals were Binance, WazirX and CoinDCX; Hong Kong-based crypto lender Babel Finance; Crypto futures and lending exchange platform CoinFLEX; Celsius and crypto lending platforms CoinLoan and Vauld.
Others are Voyager, Crypto hedge fund Three Arrows Capital and Singapore-based crypto lending firm Hodlnaut among many others.
Many exchanges later resumed withdrawals. However, while some of them already became insolvent, others tried to remain afloat by also raising more funds to remain in business. Others yet sent out messages of hope to their investors that the market and their funds are safe. But we all came to realize that the reverse is the case.
Consequently, the crash of the second largest crypto exchange, FTX and the subsequent crashing of other exchanges like Blockfi, Bitfront, Celsius, Nestcoin, and many others have raised fears in the remaining crypto investors’ minds about the safety of the only exchange everyone has come to believe is the largest exchange in the world – Binance.
Binance:
Binance, founded in 2017, is a cryptocurrency exchange and the largest exchange in the world in terms of daily trading volume.
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Changpeng Zhao founded the exchange and moved its headquarters out of China shortly before the Chinese government began crackdown on cryptocurrency trading.
In January 2018, Binance became the largest crypto exchange with a market capitalization of $1.3 billion.
Why Binance is growing stronger:
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Expansion strategy:
Binance has been on expansion drive, trying to have its presence in many countries of the world. From China to Switzerland, Sweden, Spain, Netherlands, Portugal and Austria, Malta, France and down to African countries, the exchange is not backing down.
Meanwhile, we all know that Africa has one of the largest crypto enthusiasts and investors in the world. Consequently, as a market growth strategy, Binance has continued to penetrate Africa, bringing along crypto education to Africans just like it does in every country it enters. In fact, in 2021, the exchange sponsored the Africa Cup of Nations.
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Investment strategy:
Binance also has a working strategy that has further pushed the company to number one position. This strategy is its investment drive.
In August 2018, Binance along with three other big exchanges raised $32 million for a stablecoin project to provide crypto that has no volatility like Bitcoin.
Also, in 2019, it launched Binance Jersey which offers fiat-to-cryptocurrency pairs, including the Euro and the British pound.
In January 2019, the company partnered with Israel-based payment processor, Simplex.
The partnership enabled cryptocurrency purchases with debit and credit cards, including Visa and Mastercard.
Just recently, it began accepting deposits and withdrawals in Nigerian currency –the naira.
Also Binance offered perpetual futures contract that allowed leverage as high as 125 times higher than the value of the contract.
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Binance on acquiring spree:
Binance has also been acquiring other exchanges and investing in other ventures.
For instance, it acquired Indian bitcoin exchange, WazirX. Then, In March 2020, Binance acquired CoinMarketCap while in February 2022, it took a $200 million stake in Forbes after Forbes staff released leaked documents showing that Binance and its CEO was deceiving US regulators and involved in fraud and money laundering.
Also, it invested US$500 million towards the acquisition of Twitter by Elon Musk that completed in October 2022. The exchange re-entered the Japanese crypto market on November 30, 2022,when it purchased Sakura Exchange.
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Binance Crypto coins:
Over the years, Binance has launched two crypto currencies of its own which it developed.
In developing its own crypto, the exchange has had much experience and seems to better understand the crypto market.
Its two crypto currencies are the Binance Coin (BNB), and BinanceUSD (BUSD).
Binance Coin initially started out as a way to pay for trading fees. Binance made it very clear that BNB is strictly a utility coin, meant for use within its closed garden.
So, trategically, it developed the BNB not to overthrow traditional currencies or decentralize the economy like other crypto currencies like Bitcoin are poised to do.
This further takes a chunk of negative market forces off Binance.
Binance has also implemented a Quarterly Burn system to keep Binance Coin (BNB) scarce and its transaction fees relatively stable as compared to Ethereum’s ever-rising transaction fees.
On the otherhand, the BinanceUSD is a US Dollar pegged stablecoin issued by Binance.
BUSD is a widely used stablecoin being the 3rd largest stablecoin by market capitalization.
Binance’s argument of being formidable:
Partial reserves in traditional banks:
Binance’s BUSD is in partnership with Paxos.
Paxos holds the BUSD reserves only partially in cash deposited in their US bank accounts while also having the other part held in U.S. Treasuries.
The company says it has at least 50% hold of its reserves in its wallets.
What this means is that at least 50% of the funds it holds in its total wallets belong to it.
However, the question remains: Does Binance actually own the funds in the wallets on its platform?
Binance cannot say it has a strong hold of the funds just because people have funds in their wallets on Binance.
Also, having just 50% hold of the funds as claimed is not enough.
Should anything happen, what happens to people’s investments since investors cant get back their investments from the claimed 50% reserve hold Binance claims.
Centralization of crypto currencies into Binance is hugely dangerous:
One of the encouraging mantra by the blockchain and crypto technologies is the decentralization of the market and currencies.
With cryptocurrencies, governments lack the direct control they have on fiat currencies.
However, Binance seems to be on a drive to aggregate all Bitcoins into its exchange. This is dangerous as it robs the system of the decentralization status and benefits.
Also, if all Bitcoin assembles under one exchange, as Binance is tactically pushing, an attack or a loss occurring on the exchange will have far-reaching negative impact on all.
What happens if Binance crashes?
Well, Binance says it has thought of this and so, has put in place measures in form of Recovery Fund.
The recovery fund is to reward customers in case of uncertainties.
The exchange has said that it has reserved a recovery fund to settle investors should it be faced with insolvency any day.
In 2018, the exchange established the Secret Asset Fund for Users (SAFU).
It is a $1 billion emergency cash reservoir that safeguards Binance customers in times of emergency.
Impact on African centralized entities:
Meanwhile, despite Binance’s novel strides, the exchange’s strategies seem to conflict or negate the decentralization standings of authorities in Africa.
For instance, Nigeria is pushing a massive drive for the country’s wide adoption of its digital currency –e-Naira.
The country’s CBN is also warning Nigerians against investing in crypto.
However, Binance recently said it is accepting withdrawals and deposits on its platform in naira.
This gives a punch to the e-Naira drive. This is likewise obtainable in other African countries.
In conclusion, there is no strong indication that Binance may ever crash – at least not in the near times .
However, it should not be waved away that Binance is not capable of crashing.
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