The cost of bitcoin has dropped once further in the wake of the FTX platform, 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 did the value fall so drastically?
It’s because a highly toxic combination of a stablecoin (a cryptocurrency whose price is positioned 1:1 to the US dollar or another “fiat” currency) called tether, highly skilled traders using high-frequency algorithms, and an exchange (an electronic platform for buying and selling) called Binance is at play.
Bitcoin can be traded on a variety of exchanges, unlike stocks, but because Binance controls more than 50% of the cryptocurrency market, the price of bitcoin and other cryptocurrencies is set by it. Traders must change fiat currency into a stablecoin like a tether in order to purchase cryptocurrencies. Trading on bitcoin-tether determines the dollar price of bitcoin since it has by far the highest volume of all items on Binance and because one tether typically equals one dollar. But the entire crypto-economy also collapses when bitcoin fails.
The Advantage of Binance
The problem is that Binance is solely self-regulatory. That 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 utilize 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 successful 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, investors 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 autonomously, 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 return is more or less 50/50
The current state of the cryptocurrency markets can be compared in certain ways to the 2001–2002 dot-com 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 bitcoin price fell this year as a result of some unplanned and surprising 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 the FTX platform filed for bankruptcy, consumers are unable to withdraw their money from Genesis, many other lending platforms (shadow banks), Gemini, and other exchanges.
Binance might be able to establish a monopoly after this instability. But at the moment, this non-domiciled and self-regulated organization still depend 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.