Why Crypto Exchanges Are Lowering the Price of Bitcoin

One of the most depressing revelations from the FTX trial was that Sam Bankman-Fried instructed Caroline Ellison to sell customer Bitcoins to keep the price below $20,000.

Depressing and dirty, but not surprising.

Crypto exchanges have been a popular haunt for thieves and scammers for more than a decade because there is little to no regulation and executives and owners have access to highly liquid pools of assets.

It doesn’t help that hackers infest the industry like locusts and are almost tolerated by the industry, with ransoms happily being paid after almost every hack.

North American crypto exchanges are at risk of being taken out of business by litigation (Coinbase and the SEC have been suing each other for months).

Offshore exchanges? All of the above. Furthermore, quite a few of them appear to have been run by criminal sociopaths like Sam Bankman-Fried

Let’s go over the incentives that crypto exchanges have to lower the price of Bitcoin.

First, if they run a derivatives exchange on their platform or even have accounts on other future exchanges, it is easy to earn.

If you have enough Bitcoins in customer deposits to move the market, you can sell your customers’ Bitcoins to reduce the price and then buy them at a cheaper price.

When the derivatives market is leveraged on the long side, you can liquidate the long positions, ensuring that the Bitcoin price stays low long enough to cover your short positions.

If you don’t want to get your hands dirty, you can even lend the customer deposits to someone else to do the dirty work for a fee (just hope you get the money back).

Is that illegal? If the exchange operates in an offshore country (like Barbados), it could be illegal for you to play with US residents’ funds.

But as long as you’re making money and cashing in refunds, the chances of you getting caught are very, very low.

However, there is a problem with this strategy. Many people play this game, and since Bitcoin is on the public blockchain, it is difficult to hide its tracks.

Eventually, other traders will figure out what you’re doing and pay attention. Then the game becomes riskier as other whales pool their money to bid against you. This seems to have happened in Alameda (and it turns out Sam was a lousy, terrible, sloppy dealer).

However, there is another way to line your pockets if you are an exchange. Namely, to mint your own token.

FTX had its own token called FTT. It is still being traded today.

At its peak, the token was worth $80, giving it a market cap of more than $26 billion! Even today, the token has a market capitalization of $325 million with trading volume of more than $5 million per day.

For an exchange, the playbook is simple:

1. Like the token.
2. Create trading pairs of the token for your customers to trade with.
3. Use customer funds to create liquidity pools to support trading pairs.
4. Incentivize other exchanges to offer your token by offering direct bribes or the provision of liquidity so they make money on trading fees.

The big advantage of this game (besides the fact that you have created a huge financial asset out of nothing) is that it is difficult for traders to play against you.

You can easily control the price of your token by locking up a large portion of the supply, announcing token burns, and dumping the token at any time, although the last method is a bit crude.

In the case of FTX, they created an asset worth billions of dollars on paper and then offered it as collateral. That means they took out loans against it.

It was a beautiful scam and it should have worked. But two things happened that screwed everything up.

First, the bear market, which was caused in no small part by FTX and other exchanges being too eager to scare off retail customers.

The second reason was that other players began to see through the cheating game, which became so egregious that they preferred to go public rather than “stay in the family.”

The trigger was triggered when Binance CEO Changpeng Zhao (known in the industry as CZ) called out SBF on public Twitter

This led to depositors demanding their money back, creating a liquidity crisis that brought down the entire house of cards.

First FTX, now Binance

“Cascading liquidations” occurred throughout the remainder of 2022, with several crypto companies (BlockFi and Gemini Holdings, to name just two) having to pause their withdrawals.

But now all eyes are on Binance because:

1. Because it is a private offshore company, it is subject to far less regulatory oversight compared to North American crypto exchanges such as Coinbase and Kraken.
2. There is its own coin, the so-called Binance token or BNB.

Binance is known to have paid a majority of its foreign employees in BNB tokens, so they have a lot of incentive to keep the price as high as possible.

Is it the average retail customer holding the BNB token at over $200 or is it Binance selling assets to support this price level?

And then when they sell assets like Bitcoin and Ethereum, where do they get them from?

But before we run for the exits, there are important differences between FTX and Binance.

First of all, there is a stark contrast between SBF and CZ.

A lot of dirt has been thrown at CZ, but no one believes he’s a sociopath addicted to Adderall.

In contrast, we have the court testimony about SBF, and it is brutal.

Second, the SEC has been breathing down Binance’s neck for almost a year and still hasn’t shut down the deal. Even though Binance.us is now just a shell of a company, Binance.com is still in operation every day.

Despite enormous negative headlines for more than a year, Binance did not experience a bank run.

What can we make of it?

Two conclusions

First, there is no substitute for self-custody,

Whether you are purchasing Bitcoin or Ethereum or another type of coin or token, you will need to move it to your wallet and note the seed phrase. You should even consider purchasing a hardware wallet like Ledger.

Leaving your assets on an exchange has proven time and time again to be a bad idea.

Second, the shell game cannot go on forever. The run on FTX deposits caused Bitcoin (and Ethereum) to decline. But they recovered.

When crypto exchanges want to “go wrong” and sell customer deposits, they can cause great damage. But eventually they will be found out and the price of Bitcoin will rise again.

FTX tried its best to keep Bitcoin below $20,000 but failed in the long run.

If Binance does shady things (and a lot of people throw dirt around there), it won’t last forever and you can ride out the turmoil.

Because you followed rule #1 (see above).

Play the long game.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, neither Kitco Metals Inc. nor the author can guarantee this accuracy. This article is for informational purposes only. It is not a request to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no liability for any loss and/or damage arising from the use of this publication.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers