The Cryptocurrency Market’s Nightmare Scenarios Exposed are over 30 million Exchange users. The Fear Index and the Risk of Infection are both ‘in the Red.’
When stablecoins UST and Luna went bankrupt, Binance exchange CEO Chanpeng Zhao stated that if his exchange went bankrupt, clients would be notified and able to withdraw their funds quickly. However, following the demise of FTX and suspicions that US officials aim to prosecute Zhao and the exchange for money laundering, his clientele appears to be in a state of fear.
Can Zhao keep his promise?
That’s what’s at stake these days for people active with cryptocurrency – and beyond. What happens if the world’s largest exchange, determined by trading volume, goes bankrupt? What if Tether, the third largest cryptocurrency by trade volume, collapses?
The investor fear evident in the Cryptocurrency Fear Index’s surge to monthly highs can only be defined as unwarranted. Let us not forget that the bankruptcy of FTX, which belonged to the guy who (allegedly) ensured the existence of the ecosystem, as JP Morgan formerly did for Wall Street and the US financial system, surprised the world.
With the majority of investors “underwater,” the unexpected lockout of an exchange and the total loss of any funds placed there equals… misery. But let’s take a closer look at them.
What happens if Tether Crash?
If tether, which has a market cap three times higher at more than $65 billion, were to collapse, it would set off a horrifying wave of bankruptcies for some of the cryptocurrency industry’s largest names.
Stablecoins account for a sizable portion of cryptocurrency capitalisation. Tether is the most popular stablecoin. In fact, despite losing more than $10 billion since Terra and Luna crashed (resulting in crypto-winter), the stablecoin ecosystem has remained robust, with the top ten stablecoins retaining a combined market valuation of $152 billion. As cryptocurrency prices decreased, stablecoins’ market share increased, reaching (the top 10) 17.7% of the overall cryptocurrency market of $860 billion.
The stablecoin “group”strongest “‘s child” is Tether. The overall market capitalization of USDT in circulation is 46% of the stablecoin market and 8.16% of the global crypto market capitalization. As a result, one recognizes the magnitude of his demise. Consider how badly the $18.75 billion UST market crisis impacted the environment.
What happens if Binance Crash?
The Binance exchange and its CEO may have played the most important role in the recent collapse of the FTX exchange. First, Binance pulled the plug, withdrawing $529 million in FTX tokens it had as concerns about the exchange’s financial difficulties circulated. After all, Zhao preaches that his mission is to increase transparency in the ecosystem. And the truth is that he is attempting to do so for the entire bitcoin system. For example, at the start of the year, Binance reported in a blog post that only 0.15% of all cryptocurrency transactions in 2021 were associated with some form of illicit behavior. However, US authorities appear to differ.
So the news that Binance and Zhao are under investigation for money laundering (among other things) and that the exchange failed to provide the necessary supporting documents requested of it has lit fires.
In fact, something similar to a bank run was caused. According to statistics from blockchain data firm Nansen, panicked investors withdrew more than $1.9 billion from Binance in a 24-hour period last week. The world’s largest exchange was forced to temporarily halt USDC stablecoin withdrawals in order to calm the situation, with the largest capital flight since June 13 (the time of the LUNA/UST crisis). Approximately $3.6 billion in assets had been taken from the exchange in the previous seven days, with the rate of withdrawals increasing. For Zhao, though, this is “business as usual,” and it appears that the exchange responded in this real-world stress test.
We say “looks” because the problem may be hidden “under the sheet”. With last week’s genuine outflows topping $8 billion, rumors that the business failed to finish withdrawals of the most frequently used stablecoin, USDC, have heightened market anxieties. Furthermore, there are allegations that Binance is using its own currency, BNB, as collateral for loans, which the business disputes. However, if it proves to be accurate, Binance may be left exposed in the same way as FTX was with the FTT coin. Binance would be unable to repay its loans and would be forced to sell all of its Tether stablecoins quickly. This, in turn, would result in Tether losing its $1 price hold and a cascade effect across the cryptocurrency market. But, before we get to Tether, consider the possibility of dominoes, or “contagion,” as it is known in the crypto-market.
The bankruptcy of the FTX exchange showed how serious the risk of an event “contaminating” the rest of the market is. Following FTX’s demise, crypto-lender BlockFi declared bankruptcy, while hundreds of other enterprises in the ecosystem suffered losses in the millions of dollars. For example, Genesis was left with approximately $175 million “locked up,” or rather lost, in FTX. This domino demonstrates how interconnected the corporations in the ecosystem are, which explains why… no one feels safe anymore.
The fact that insurers are already refusing to cover their customers exposed to FTX demonstrates how serious this danger is. This means that digital currency exchanges and traders are now uninsured for damages caused by hackers, theft, and lawsuits.
However, given the significant volatility of cryptocurrency values and the lack of market control, experts from Lloyd’s of London demanded increased transparency from cryptocurrency companies, particularly those exposed to FTX. Insurers even request that their customers fill out lists indicating if they conducted dealings with the bankrupt exchange.
The preceding demonstrates the widespread dread of a Binance or Tether collapse, or both, resulting in the… ideal tsunami. What are the ramifications of this? Billy Marcus, co-founder of Dogecoin, provides the terrifying answer. “To people concerned about Binance and/or Tether falling,” the American software developer tweeted, “it’s game over if either does.”