After the FTX Crash, Here’s What You Need to Know – The Crypto Bubble Is Really Bursting | Carol Alexander

Fdistance bankruptcy One of the world’s largest cryptocurrency exchanges, FTX, has dropped the price of Bitcoin (BTC) again. It is now about $16,500 – a far cry from its all-time high of $66,000 just a year earlier.

Why such a significant drop in value? It’s because of the highly toxic combination of an exchange (an online platform for buying and selling) called Binance, a stablecoin (a cryptocurrency whose price is pegged 1:1 to the US dollar or other “official” currency) called tether, and skilled professional traders who run high-frequency algorithms.

Unlike stocks, bitcoin can be traded on many different exchanges, but Binance has it More than 50% of the entire crypto marketAs a result, it determines the price of Bitcoin and other cryptocurrencies. In order to buy cryptocurrencies, traders must convert fiat money into a stablecoin such as Tether. Bitcoin-tether has the largest volume out of all the products on Binance, and because one dollar usually equals one tether, trading on bitcoin-tether determines the price of bitcoin in dollar terms. But when bitcoin crashes, so does the entire crypto ecosystem.

The problem is that Binance is only self-regulated, which means it is completely unregulated by traditional market regulators like the Securities Commission in the US or the Financial Conduct Authority in the UK. This is a huge attraction for professional traders because they can Deployment of high-frequency price manipulation algorithms on Binance, which is against the law in regulated markets. These algorithms can cause rapid ups and downs in price movements, making Bitcoin very volatile.

Binance performs its own clearing and settlement of trades, just like all other self-regulated cryptocurrency exchanges. This means that losing counterparties – those on the other side of profitable trades – often have their positions erased automatically Without warning.

Unlike regular exchanges, self-regulatory cryptocurrency exchanges are not required to raise the alarm when a trade loses so much money that the collateral in the account needs to increase in value. Instead, traders are solely responsible for funding their accounts by constantly monitoring something called the liquidation price. This is done automatically by algorithms run by professional traders, but it is cumbersome for casual players like you and me, who need to be very careful when using manipulation to create the volatility that professional traders use to increase their profits.

When professionals trade against each other, it is called a toxic flow, because the chance of winning is more like a 50-50 if their algorithms are equally fast and efficient. Professional traders prefer the counterparty to be a regular investor.

This is worrying because Binance has been hugely successful in attracting regular investors. The fees he earns from this type of investor have financed its very rapid expansion; It is now branching out with its own stablecoin, blockchain and NFT. Binance is strengthening its role as the Amazon of cryptocurrencies, following a very efficient business model.

In some ways, one can liken the current conditions in the cryptocurrency markets to the bursting of the dotcom bubble in 2001-2. The investment capital that poured into Internet startups in 1999-2000 suddenly dried up, as many companies went bankrupt. this year, Three shares of capital, one of the largest cryptocurrency hedge funds defaulted on its loans, major cryptocurrency lenders Celsius and Voyager filed for bankruptcy as the price of bitcoin collapsed, after some unexpected and spectacular attacks on a new type of stablecoin called Terra. After the bankruptcy of FTX, many other exchanges like TwinsAnd lending platforms (shadow banks) incl origin It prevents customers from withdrawing their money.

We will see more of this contagion, leading to widespread bankruptcies among startups now that venture capital in the crypto sector has dried up. More exchanges and lending platforms, as well as blockchains, NFT marketplaces, data aggregators and analytics companies, will all hit the dust.

Binance can get out of this mess with a monopoly. But for now, this non-resident, self-regulatory firm still needs fee income from ordinary investors, and it needs market makers (professional traders who look like unfriendly stock exchange stall holders) to do its business.

The danger is that everyone is very scared now, so the only way to attract regular investors is to raise the price of bitcoin again. This would tempt people back into the crypto game, only to have their savings destroyed as the cycle of volatility continues.

Carol Alexander is Professor of Finance at the University of Sussex and a consultant in cryptocurrency markets and financial risk analysis

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