Steemit Crypto Academy Contest / S6W2- Centralized Cryptocurrency Exchange Platforms and Its Risks
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Hi steemians,
Welcome to my last entry in this week's engagement contest. As we all know, the engagement challenge rule is that everyone should enter just one contest in a day and as there are 7 participating communities, it means that we can enter this entry in seven days. I have made entries from day 1 till this very last day and that is what made it my entry number 7. Let's get started.
Welcome to my last entry in this week's engagement contest. As we all know, the engagement challenge rule is that everyone should enter just one contest in a day and as there are 7 participating communities, it means that we can enter this entry in seven days. I have made entries from day 1 till this very last day and that is what made it my entry number 7. Let's get started.
Today we are looking at a very unique topic "Centralized Cryptocurrency Exchange Platforms and Its Risks". Eventually, all traders on the steemit platform use the centralized exchange. So in this article, we are going to be looking into details on risks associated with the centralized exchange.
How do you agree with this saying “Users may be surprised to learn that in a bankruptcy scenario, they may not consider the cryptocurrencies and funds deposited in their accounts as their own”?
Yes, I agree with this saying that during a bankruptcy scenario, the crypto asset deposited in the user's account in a centralized exchange is not considered theirs. The reason why these assets are not considered theirs during bankruptcy is that crypto assets are not seen as legal tender by many people I.e it is not generally accepted by all especially the government and hence do not have any bankruptcy law guiding them. Before we proceed, what is bankruptcy?
The word bankruptcy is used when a given business organisation or an individual is unable to pay an outstanding debt I.e if such a person or group borrows money and at end is unable to pay within the given timeframe. When this happens, the asset in the account of the person or the business organisation is seized or frozen completely.
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Such assets can not be accessible by the owners any longer because the organisation which they borrowed this money from will seize the asset at that period. Recall that centralized exchange platforms have complete access to our account since they all have the private key to it and at any point in time they can do and undo it.
A very good example of traders borrowing money from the exchange and being unable to pay back is during margin trading. We know that the centralized exchange has a feature where traders can borrow from the exchange and then use the amount borrowed to trade and earn a high rate of interest if the trade goes as predicted. This trade is designed in such a way that immediately after the trade, you return the money borrowed to the exchange and also the little leverage and then the profit goes to your account. You can set it automatically or you can manually pay it back.
Similarly, if the trade does not go as predicted, you have to pay the money borrowed as well. Now, this is where the assets present in your account will be seized and used to repay the borrowed money. So exchanges also borrow from other bodies and if, after borrowing, they are unable to pay back, the entire asset of the exchange goes bankrupt because they have all been committed by the exchange.
We all know that centralized exchanges use our assets to do their business and earn a profit because they have complete access to them and that is the reason when the exchange goes bankrupt the entire asset present are considered theirs and are seized during the period. So users who deposit these assets may not consider them as theirs during Bankruptcy.
Explain, from your point of view, why did the FTX platform go bankrupt? how did you find it? What are the other consequences of this accident?
Just like the Binance exchange platform, FTX is also one of the major centralized exchange platforms that house many users as well. The bankrupt situation that happened with these exchanges made all the holders lose their assets because it was seized and the money used to pay back all that the FTX exchange has borrowed.
In my own opinion, some reasons may lead to the bankruptcy of the FTX exchange and a few of these reasons are that they allow their users to perform more margin trade and they give them much or big leverage which in most cases, the trade does not go as expected and then the asset present in the wallet of the trader may not be enough to pay back the borrowed money hence the exchange takes the responsibility of paying until the users funds his or her wallet again or makes a profitable trade for the money borrowed to be removed.
Another reason I believe that led to the bankruptcy of FTX is borrowing from other bodies and they are not able to pay at the stipulated time. In summary, I want to say that in my opinion, what led to FTX's bankruptcy was the mismanagement of the funds they have and also allowing most of their users to trade margin using very high leverage which is risky.
I saw the news first on the binance exchange because I subscribe to their news channel and I get notifications on all the latest news. Immediately I saw it, I went ahead to read through it and also went to Twitter to see how many people were lamenting. To confirm the scenario, I saw major crypto assets dropping drastically.
I was called by one of my subordinates I.e someone I introduce to the platform that what is happening to crypto as he sees his portfolio dropping with the speed of light, I then told him what has happened, and he was scared and ask if that has happened before and I said no. He wanted to sell his asset on Binance at that moment but I encouraged him to keep it for the main time.
The other consequence of this accident is that a lot who are planning to invest in the crypto world has been drawn back because of the scenario. A lot of people see cryptocurrency as a scam and with this, people are even more scared of investing in it again. I have talked to a friend who was ready to put money in steemit by purchasing and holding millions of steem power but a week before that could happen the FTX news came on board and when I explained to him what has happened he instead decided to invest the money on a physical business that he can see.
If you are so pessimistic, what do you think is the worst thing that could happen to cryptocurrency after the FTX incident? And what will be its impact on Bitcoin?
The incident of FTX has made a lot of people both old investors and new ones lose faith in the future of cryptocurrency. Most people believe that the worst is yet to come. You will agree with me that since crypto came into existence, this year has been the worst that recorded two terrible situations I.e the case of LUNA and FTX.
People have lost confidence due to these scenarios. Though there are people like myself that believe that this is a preparation for a new bullish face. Despite that hit blow, the price of bitcoin didn't drop as most people predicted it. It means that there is still some confidence among crypto holders because people didn't rush to sell off their assets.
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The incident affected bitcoin and other altcoins because, within that period, almost all the cryptocurrencies experienced a price decline. We saw the market all in blood and people's portfolios began dropping drastically. Though bitcoin was able to hold its balance as it didn't drop as predicted by many people.
People thought that crypto will come to an end as they except the price of bitcoin to drop much. Bitcoin maintains a certain level and that also gave other altcoins balance. I'm very optimistic that due to the security features of crypto, it will still move to a more bullish face with time.
Could this incident reinforce the view that cryptocurrencies are outdated and unstable, because they do not have collateral, unlike state currencies such as the euro or the dollar?
Cryptocurrency as we know is very volatile. Though there is no government backing if things go wrong. The incident of FTX shows clearly that there is much risk associated with cryptocurrency investment. In my opinion, we can't say that cryptocurrency is outdated but in the case of unstable, I have mentioned earlier that it is designed to be very volatile and that is where the profit and the losses come from.
With this incident, it is expected that the government provide a means to avoid such an ugly situation from happening again. Looking at what people have lost from this investment, the government should come together and give a legal backup to help investors avoid such losses in the nearest future.
Cryptocurrency is the future and accepting and protecting it now by the government will go a long way in fostering its growth globally. Exchanges should have government supervision to avoid all these from happening again.
Do you think that Binance's decision to buy FTX will reassure the previous investors of this platform and what is the future of the FTT cryptocurrency?
Yes, Binance's decision to buy FTX will surely reassure the previous investors and give them confidence in the platform once again. Binance is the world's largest centralised exchange platform and has been doing extensively very well by attending to its customers.
The collaboration between Binance and the FTX exchange will bring some sort of trust and improvement to both exchanges. This is because Binance will have the opportunity to provide its users with more products and the FTX in turn will get more users since Binance has the highest number of users when it comes to exchanging.
With Binance buying FTX exchange, the users of the platform will confidently go back to it knowing fully well that the management has changed and that a lot too will change to avoid the former incident. Investors will be more confident this time knowing that it is now under the watch of the world's largest exchange platform.
The future of the FTT crypto asset which happens to be the native token of the FTX exchange is unknown at the moment. If Binance buys the FTX exchange, they may decide to maintain the asset and then work to improve its price or they may decide to delist it and in collaboration use only BNB in both Binance and FTX.
If they are to maintain the coin, they will work to improve the price just like BNB but if not the coin will be delisted from the crypto space completely.
The incident of the FTX exchange has shown clearly that users should be more careful when storing their assets in a centralized exchange because anything can happen at any time. Users should always keep their assets in a decentralized exchange where only they have complete authority over the asset. Finally, I want to invite the following persons to also join the contest today @stef1, @jyoti-thelight, @graceleon, @karianaporras and @malikusman1
Dear @simonnwigwe,
Your informative post is a source of many concepts for me because there are many new points there.
True, the centralized exchanges are the control of the company and thus when there is a situation like bankruptcy of the exchange all the assets present in that exchange are completes seized.
There is no company in the decentralized exchanges that control these funds they are more secure than the Centralized Cryptocurrency Exchange Platforms.
I wish you many success in the contest of this week.
Your articles are really very interesting I must commend friend, as I always tend to see important points for personal knowledge and for future researches.
Cryptocurrency held on centralized exchanges is also vulnerable to a bankruptcy scenario. If an exchange has been declared bankrupt, the user will likely lose access to their funds according to the legal structure of the platform in question. This makes it important for users to know what types of measures the exchange is taking to protect user funds from potential bankruptcy scenarios.
You have made a really important point here friend. As more user come into the centralized exchanges, they make more money for the platform, which means their profits are solely dependent on the funds of users.
You have written an outstanding post boss, and I wish you goodluck in this contest.
You have presented a very impressive entry in the contest and I really like you way to present all the ideas about the topic and the current happenings in the market.
I agree with you dear brother. Although, this is a very tough time for the cryptocurrencies market but we cannot consider it as outdated because normally it always tend to provide a huge volatility that is a source of equal profits.
If we look on to the current situation of the FTT token then this will surely be improved to an extent if the Binance exchange will invest more in this token. But if not, then the things are going to be worse.
We can only wait for the next moves of the market. I strongly believe that the market will surely make an positive turn as soon as the accumulation phase ends.
Thanks a lot for sharing your Quality post with us. Good luck boss.
Thank you, friend!
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I agreed with you have have Discussed in the first question. However, in my own case there should also be a way that Investors can be compensated should in case the company go bankrupt. I think having a means of insurances of Investors fund should also be good.
Nice write-up. Best of luck to you.
Your post has been successfully curated by our Team 5 via @malikusman1 at 50%. Continue making quality content for more support.
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Hey brother,
You post is amazing and you put amazing and Informative stuff in it. Got to much information after reading your post.
Brother this is the reason as you mentioned that the FTX exchange bankrupt due to that they give to much leverage to thier user and thier trade gone wrong and ultimately they don't have funds to return to the exchange. But other thing I want to add is that the FTX exchange use the Users funds in Almeda Research and they got loss from there and then a gap of 9 Billion Dollar creates between the amount they have to pay thier user.
I'm not fully agreed with this statement because Binance is the one of those reasons which make FTX bankrupt.
Binance CEO CZ post on 7 November that they are going to Sell thier all FTT holding just to exit from FTT market as a they don't want to bear loss like LUNA. They compare FTX with LUNA even FTX and BNB working is almost same and after this tweet FTX loss it's price by 10% and a panic creates that FTX is going to bankrupt and start withdrawing your assets.
If Binance really want to help it then they don't have to say they can't work with FTX as they are working against Binance.
I also make a post on it please visit and read it.
You have done with a impressive entry good luck in this contest.
@cryptobitcoins
This is a beautiful publication. It's really practical and self explanatory I was really caught by this
This is the great truth I must say. These little episodes has stirred a lot of discouragement to various investors who would want to venture into the cryptocurrency. You have hit the nail on the head with this bullet point. I wish you all the very best in this contest.