Decentralized finance has come a long way since the world’s first cryptocurrency, eCash, made a somewhat muted entrance in the early 90s. While thousands of virtual currencies are available to purchase, the vast majority don’t have the same staying power as the sector’s poster child, Bitcoin.
In fact, not only is Bitcoin the most popular digital asset today, but many online exchanges have sprung up to cater to the increased demand for blockchain-based tokens.
Indeed, one of the largest exchanges, Binance, handles a massive amount of trading volume daily. But with the high-profile collapse of Mt. Gox and now FTX, many investors are wondering what would happen if Binance itself succumbed to the same insolvency and ruin.
In this article, we’ll explore the potential effects of such a collapse, as well as the consequences for other players in the crypto space.
Source: Unsplash
A Big Win For Coinbase
There’s no doubt that the demise of Binance would have a significant impact on the wider cryptocurrency market. Prices would likely drop sharply as investors panic sold their Bitcoin, while other exchanges and marketplaces would also experience selling pressure as traders tried to get rid of their assets before prices fell further still.
On top of that, the loss of Binance could also lead to a loss of confidence in digital tokens as a whole. After all, if one of the biggest and most popular exchanges can’t stay afloat, what does that say about the sector’s long-term prospects? This could trigger another sell-off and push prices even lower.
In the worst-case scenario, Binance’s collapse could be the catalyst that finally brings about the end of Bitcoin. With no major exchanges left to trade on and confidence at an all-time low, there would be nothing stopping prices from falling to zero.
However, it’s also possible that other key cryptocurrency exchanges would rise to prominence. Indeed, if Binance was forced into liquidation, the second biggest exchange, Coinbase, could easily be the prime beneficiary.
That said, it could potentially lead to an increase in the use of decentralized exchanges too. Decentralized exchanges – which operate on a blockchain and do not have a central authority – have grown in popularity in recent years, and may see an increase in usage if a renowned centralized exchange like Binance disappears from the scene.
Stoking The Fires Of Uncertainty
Binance released its much-vaunted Proof of Reserves report recently. The audit was intended to reassure investors that the platform was sufficiently collateralized and not likely to suffer the same fate as its rival exchange, FTX.
However, the appraisal seemed to have the opposite effect as initially planned. Many investors are now more worried than before, with flaws in the accounting process leading some to speculate that Binance is in a worse position than previously thought.
For example, the investigation did not include a full, independent third-party audit. While it did release a report showing that it held sufficient assets to cover investors’ funds, the final publication was not signed off by one of the usual big-name auditing firms.
Moreover, the audit has also raised concerns about Binance’s business practices. Some investors are questioning whether the exchange is transparent about its operations, as, in the past, other cryptocurrency exchanges have claimed to be financially stable, only to collapse or go bankrupt later on.
In fact, the company that carried out the audit, Mazars, was forced to make a humiliating volte-face in December, stating that it “will temporarily pause” its work with all its global crypto clients, including Binance, KuCoin and Crypto.com.
This environment of confusion and uncertainty permeating the crypto universe is not helping an already volatile situation. Indeed, Binance has seen massive outflows of money lately, with some observers comparing the company’s core business to that of a “black box.”
Is Self-custody The Future Of Cryptocurrency?
As the world anxiously awaits another potential crypto collapse, traders are increasingly turning to self-custody methods to store their Bitcoin and other virtual tokens.
Self-custody, also known as cold storage, involves keeping a wallet’s keys offline in a secure location, such as hardware like the Ledger Nano X or another physical device. This means that even if an exchange is hacked or goes bankrupt, your funds will still be safe. While it may take extra effort to set up, many traders believe it’s worth it for the peace of mind it brings.
Moving away from centralized exchanges is a positive development for the industry, as it reduces counterparty risk and gives users more control over their funds. While there may be some short-term pain as investors adjust to new platforms and wallets, this will strengthen the ecosystem and make it more resilient in the long run.
Indeed, there are several advantages to using self-custody wallets. You control your own private keys, and can therefore more securely store coins and tokens wherever you please. In addition, self-custody wallets allow you to easily and quickly send and receive payments without going through a third-party exchange.
Furthermore, since financial transactions on a centralized platform are visible to the owners of the exchange, using a cold storage method to house your crypto securities adds another layer of privacy. With a self-custody wallet, your transactions are only visible to you and the people you’re dealing with, meaning that your financial activity is more private and secure.
However, there are some drawbacks to using cold storage. First, it’s not completely foolproof. There’s always a chance that physical damage can occur to the devices, which would render the stored data inaccessible. Second, the cost of hardware can be prohibitive for some people, and, once the coins are stored, it can be difficult or impossible to access it again without the right encryption details or software.
Conclusion
As the crypto world continues to grow and evolve, so too do the risks associated with investing in digital assets. Indeed, one of the biggest concerns for investors is the possibility of another crash like that which engulfed FTX not so long ago.
But with the prospect of a future catastrophe in the offing, it’s no surprise to see traders exiting the industry in droves. Market participants are reducing their exposure to risky exchanges, and moving their investments into offline and cold storage alternatives.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.