After the bankruptcy of one of the largest cryptocurrency exchanges in the world, FTX , the price of Bitcoin (BTC) has fallen again. It's now around $16,500, a far cry from its all-time high of $66,000 just a year ago.
Why such a sharp drop in value? This is due to a highly toxic combination of an exchange (electronic trading platform) called Binance, a stablecoin called Tether (a cryptocurrency whose price is pegged to the US dollar or other “fiat” currency), and skilled professional traders attributed. Work with high frequency algorithms.
Unlike stocks, bitcoin can be traded on many different exchanges, but Binance owns over 50% of the entire cryptocurrency market and ultimately determines the price of bitcoin and other cryptocurrencies. To buy cryptocurrencies, traders need to convert fiat currencies into stablecoins like Tether. Bitcoin tether has the largest volume of any commodity on Binance, and since one dollar is generally equal to one tether, trading Bitcoin Tether determines the dollar price of Bitcoin. But if bitcoin goes down, so does the entire cryptocurrency ecosystem.
The problem is that Binance is only self-regulated, which means it is not fully regulated by traditional market regulators like the US Securities and Exchange Commission or the UK Financial Conduct Authority. This is a major attraction for professional traders as it allows them to install high-frequency price manipulation algorithms on Binance that are illegal in regulated markets. These algorithms can cause prices to rise and fall rapidly, which makes Bitcoin very volatile.
Binance, like all other self-regulated cryptocurrency exchanges, manages its own billing and transaction settlement. This means that losing partners on the other side of a profitable trade will often automatically liquidate their positions without warning.
Unlike normal exchanges, self-regulatory cryptocurrency exchanges do not need to sound the alarm when the account needs to be paused because the trade is losing too much money. Instead, traders are solely responsible for funding their accounts by constantly monitoring the so-called liquidation rate. This is done automatically by algorithms controlled by professional traders, but it is daunting for casual players like me and I who have to be very careful with the manipulations used to create the volatility that professional traders use to create their maximum profits.
When experts trade against each other, this is called toxic flow because if their algorithms are also fast and efficient, then the odds of winning are 50 to 50. Professional traders prefer their partners to be regular investors.
This is due to the huge success Binance has had in attracting regular investors. Fees from these types of investors fund its very rapid expansion; It is now branching out with its own stablecoin, blockchain, and NFT Market. Binance is strengthening its role as the Amazon of cryptocurrencies by pursuing a highly efficient business model.
In a way, the current state of the cryptocurrency markets can be compared to the bursting of the dotcom bubble in 2001-2002. In 1999-2000, the investment capital flowing into Internet start-ups suddenly dried up as many companies went bankrupt. This year, Three Arrows Capital, one of the largest cryptocurrency hedge funds, defaulted on its loans and major crypto lending companies Celsius and Voyager filed for bankruptcy as the price of bitcoin soared, failing in a new sudden and shocking attack together. A stablecoin called Terra. After the collapse of FTX, a number of other exchanges such as Gemini and lending platforms (sham banks) including Genesis prevented customers from withdrawing their funds.
As venture capital dries up in the crypto sector, we will see more of these infections leading to massive startup failures. More and more exchanges and lending platforms are gathering dust together with blockchains, NFT markets, data aggregators, and analytics companies.
Binance may get out of this mess with a monopoly. But for now, this homeless, self-governing community still needs returns paid by ordinary investors, and it needs market makers (professional traders, similar to a hostile trader in the stock market).
The danger is that everyone is so scared now that the only way to attract regular investors is to push the price of bitcoin higher again. This can put people back into the crypto game only to see their savings melt away as the cycle of volatility continues.