I would be the first to tell you that Sam Bankman-Fried won’t be the last crypto crook to fall. This is what it takes to bring a new asset class to maturity. Crypto is a wild frontier, and no wild frontier would be complete without rustlers and bandits.
When financial markets like those we see today were just getting started back in the 1600s and 1700s, there were scandals, bubbles, and even a few collapses. New asset classes come along so rarely that nobody alive today has any memory of ever going through this kind of event.
That means that every time one sketchy boss sees their business collapse, the broader market has to go through the whole song and dance of asking “Is this the end of crypto?” It’s not.
With that in mind, I think it’s important to look at Binance and its #1 boss, Changpeng Zhao, or “Sleazy C.Z.” Despite being the biggest crypto exchange in the world by volume, I still don’t trust it.
The Casino Trap
On the most basic level, Binance doesn’t rise all the way to alleged criminality like SBF does, but it is still fundamentally underhanded, taking advantage of its customers rather than trying to provide them with value.
They once offered their users the possibility of 100x leverage when trading crypto. What that essentially means is that they will lend money for crypto trades equal to 100 times what the user themselves is putting into position.
That means that all gains are multiplied by 100, and so are all losses. Normally, when trading crypto, it’s impossible to lose more money than you use to buy in. If your crypto goes to zero, then that money is gone, but that’s the end of it, it’s gone.
If you leveraged it, though, you’d owe even more, equal to however much you leveraged. So, basically, Binance wants to turn its users into degenerate gamblers, put dollar signs in their eyes so that they make massive trades they can’t afford to boost Binance’s volume, and wind up on the hook for money they don’t have.
Losing With Leverage
Part of what makes this kind of leverage so insidious is how it can turn small losses into unaffordable huge losses.
Let’s say you invest $1000 in bitcoin. We’ve been dealing with a bear market, and in the last 24 hours, Bitcoin has taken a loss of about 3%. That means the value lost has been about $30. Not great, but manageable for anybody who can afford to invest that money over the long term, and wait for the asset to rebound.
If you had leveraged it 100x, you’d have lost $3,000 instead. That could wipe out an entire position in a portfolio in terms of wealth.
For somebody trying to chase the false promise of hitting one big win and never having to work again, a careless trader could wind up on the hook for even bigger debts, maybe debts too big to pay back.
The fact that Binance doesn’t offer leverage that big anymore doesn’t make them look better in my eyes. I think they just did it as a PR move, and they still offer 20x leverage, which is still big enough for someone to financially destroy themselves.
Binance doesn’t care. Binance just wants volume.
Be Careful with Your Crypto
This history of outrageous leverage demonstrates the kind of extreme tactics that Binance will use to grow its volume, but they aren’t the only thing it does. Just recently, with more scrutiny on them due to the atmosphere of caution following FTX, they’ve published the results of a reserve audit that lots of critics are questioning.
Whether or not this audit even proves that the exchange has enough crypto on hand to offer security for its users is an open question. That question is only getting more open since the accounting firm that conducted the audit, Mazars, has stopped taking crypto audit jobs.
I don’t think what Binance does rises to the same level of outright theft that we were seeing from SBF over at FTX, but I still wouldn’t trust them. I think that C.Z. is ready to sell out the interests of his customers to make money and strengthen his platform.
I’d stay away, and avoid being the one who gets sold out.