Will Binance Collapse Next? 🤔
All eyes are on Binance as concerns on the health of the company continue to grow. But here's what everyone is missing...
✨ Crypto Made Simple ✨: What’s a Private Key?
“Not your keys, not your crypto.”
You may have heard this term as a reference to the fact that you don’t actually own your crypto unless you use self-custody, which includes knowing your private key.
The idea is that if you hold your cryptos on a centralized exchange, they have access to them, which has been the case with any type of financial exchange.
However, being able to possess your own holdings is one way that cryptocurrency improves on the current financial system.
You see, all cryptocurrencies are held in “addresses,” which you can think of like bank accounts on the blockchain. And just like your routing numbers and account numbers at the bank, your crypto address is a random string of letters and numbers.
Understanding Private Keys 🔑
We touched on this a few weeks ago with the Metamask example, but it’s very important to know: There are some uniformities in addresses based on what blockchain the account is on (“address” and “account” are interchangeable here).
For example, every address on the Ethereum blockchain begins with “0x.”
If you have an account at a centralized exchange like Coinbase or Robinhood, you’ll be able to find your address for each crypto — but they usually don’t make it easy.
On the other hand, if you set up your own account to hold your crypto off exchanges, it’s not just easy to see your address, it’s also necessary that you know it. This includes any account on Metamask or, as we went over on Tuesday, hard wallets, like Trezors and Ledgers.
Since you’re holding your coins in self-custody with these types of accounts, you’ll also need to know your private key, which can either be a random sequence of words (called a “mnemonic” or “seed phrase”) or a random string of letters and numbers (which is usually way longer than an address).
If you use a Trezor or Ledger, you’ll be given the seed phrase as you initially set up the device.
If you have a Metamask account, you’ll need to go to the dropdown menu in your browser, click the circle in the top right, and then click “Settings” at the bottom:
Then, click on “Security & privacy”:
After that, there’ll be an option to choose “reveal secret recovery phrase,” which will show you your keys.
Keep Your Keys Safe 🔒
No matter which wallet you use, you’ll want to make sure you write your keys down and keep them in a secure place (or places).
Here’s why having your keys is crucial…
When you’re accessing your crypto on your own personal computer, all you’ll need to do is enter a password that you created (which you should also write down), and you can access your wallets.
However, if you ever lose your hard wallet or no longer have access to your computer, you’ll need to enter your private key in order to access your wallet and recover your coins.
Next week, we’ll go over some basics of setting up Ledger and Trezor wallets.
Will Binance Be the Next Domino to Fall?
If the crypto world in 2022 could be summed up in three words, they would be: fear, uncertainty, and doubt (FUD).
Now, we’ve seen some surprising things this year … but I think the FUD has gotten pretty out of control. For a quick update, watch the video below:
In fact, even though the crash hasn’t been as bad in some ways, the amount of baseless skepticism is worse.
Don’t get me wrong: There are reasons to be skeptical about certain things in crypto — but right now, people are taking it to a new level.
While you could justify that nobody is safe based on 3AC, FTX, and Genesis all (probably) going bankrupt, I still think there’s an important line that’s been crossed.
In case you haven’t seen the hysteria on Twitter, the most recent FUD victim is Binance, which is the largest crypto exchange in the world. It started building up last week and intensified this past Monday and Tuesday as people began pulling tons of money off the exchange.
According to Glassnode, during the two-day span, about 50,000 BTC and 350,000 ETH were transferred off Binance. In addition to that, about $3.5 billion in Binance’s stablecoin (BUSD) has been redeemed, mostly for USDC.
While that’s a ton of money — about $4.5 billion in total — it hasn’t been enough to put a meaningful dent in Binance’s total reserves.
But Is the FUD Justified? 🤔
To me, this seems like a coordinated bank run, as big players are targeting any sign of weakness. It may be malicious, but it also may be justified considering how much damage has been done by irresponsible money management this year.
If there are more weak players in the market, it’s better to expose them now rather than prolong the inevitable.
Because of this attempted bank run, a lot of focus has been put on Binance’s reserves. This is where the criticism lies: Nearly half its reserves are in its own tokens, BNB and BUSD.
Now, I don’t think this is anything close to an optimal situation, especially due to the FTX/FTT situation. Clearly, companies shouldn’t be betting on their own coins maintaining value.
At the same time, comparing Binance to FTX is really irresponsible.
Unlike FTX, you can actually trace Binance’s reserves to a large number of wallet addresses, as it showed in its “proof of reserves” analysis. Even after the large withdrawals and BUSD redemptions earlier this week, it still has almost $60 billion in proven reserves:
And while BNB may be very prone to volatility, BUSD as a regulated stablecoin seems like a much more responsible choice to have as a large position in their reserves.
Without getting too far into the weeds, BUSD is issued to the Ethereum blockchain by a company called Paxos, and Binance has created a way to make it available on other chains as well.
Paxos is regulated by the New York State Department of Financial Services, and New York is probably the most stringent state when it comes to crypto. As a result, I don’t see this as an issue at all.
The Hard Work of Staying #SAFU
So, that leaves us with one big question: Is Binance borrowing against its reserves? (And if so, to what extent?)
After FTX went down, CZ — Binance’s CEO — posted the following Tweet:
According to him, Binance has never borrowed against its BNB, and it’s never taken on debt.
Given everything that’s happened this year — most recently, Genesis going from “we had $7 million of exposure to FTX” to “we need a $1 billion bailout” in the span of a few days — it’s hard to take what any big crypto figure says at face value.
However, the $60 billion in provable reserves is the ultimate FUD-killer for the “Binance is insolvent” rumor.
Overall, I believe the FUD surrounding Binance is completely overblown. While it’d be nice to see it move away from holding so much of its own tokens as reserves, there’s nothing suggesting it’s insolvent or in any type of danger.
Fear is definitely contagious. Crypto has had its share of disasters this year, but we also have to be able to discern actual problems from baseless accusations.
Lastly, I’ll highlight Coinbase again as the standout when it comes to responsible exchanges, as it has a majority of BTC and ETH as its reserves:
Unfortunately, Coinbase doesn’t disclose its cold wallet addresses, but the fact that it’s a publicly traded company with professionally audited financials (including liabilities) is a good sign.
Having a majority of BTC in your reserves is much better than your own coin being your largest holding, and I think Coinbase has done a very smart thing by not issuing its own token.
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Timely advice Ian, many thanks.
Thanks for the unbiased information.