Fallout From FTX Collapse Leads To Major Bitcoin Outflows From Exchanges

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Credit: Executium on Unsplash

By Landon Manning

Due to the recent calamity of popular crypto exchange FTX becoming insolvent almost overnight, large numbers of bitcoin users are learning about the nature of bitcoin self-custody by withdrawing their assets from exchanges.

In early November 2022, the Bitcoin and cryptocurrency industry experienced a dramatic shake-up that brought the price of bitcoin below its 2017 price peak. FTX, one of the largest crypto exchanges, seemed to have it all: a large user base, ever-growing valuation and plenty of prominent partnerships with major sports leagues. However, it was discovered that the company’s “cash reserves” were actually in the exchange’s own massively illiquid FTT token. The house of cards came tumbling down shortly after this revelation.

The issues came to light during a bank run on the exchange when many of the 1.2 million users tried to withdraw their assets, which the company did not have. A drop in confidence like that can cause billions of dollars of valuation to evaporate, which is exactly what happened to FTX. Now, the majority of users who had funds on FTX are realizing that all their money has vanished. Additionally, as crypto users all across the space are discovering, FTX’s customers are hardly alone in being concerned.

Although the CEO of Binance, the world’s largest cryptocurrency exchange, has been publicly reassuring users that the company is running perfectly smoothly, many other exchanges have fallen victim to the contagion started by FTX. The first domino was Genesis Global, a crypto lender with over $2.8 billion in active loans. Despite claiming that the system remains operational, on Wednesday, November 16, the firm announced that there would be a freeze on all withdrawals and new loans for an indefinite period while it looked for sources of “fresh liquidity.” By Friday, the company followed up in a now-deleted tweet with the revelation that it would likely collapse without $1 billion of new liquidity by Monday, November 21. Another major player set to go under in the blink of an eye.

This second exchange is a symptom of the growing crisis of confidence sweeping the entire industry. Already, several other major exchanges like Huobi and are experiencing bank runs and severe tests of their solvency. It’s anyone’s guess as to how many of these firms have the confidence and actual cash reserves to weather such a challenge. This is something of a silver lining for Bitcoin enthusiasts, as investors are finally waking up to one of the biggest advantages and core design principles of Bitcoin.

All across the industry, users are pulling their bitcoin off exchanges in record numbers; Glassnode claims that exchanges as a whole are seeing $1.75 billion of bitcoin being drained per month at this rate. This is good news because it shows that the whole community is beginning to relearn some of the reasons why Bitcoin is so robust.

From its very DNA, bitcoin is intended to be a trustless, decentralized currency without the need for middlemen. Self-custody enables people to hold their own coins and promote a new economic model that protects users from the destabilizing and predatory practices of banks. However, as the value of bitcoin has risen dramatically in the years since its inception, many new users remain either ignorant or indifferent to these origins and largely see the asset as a speculative investment like any old stock or commodity. The growing trend of people leaving their bitcoin on exchanges is one of convenience. People who are only trying to get a return on their investment are not interested in learning about self-custodying solutions, hardware wallets, private keys and seed phrases. Now, as FTX customers are teaching the whole world, the price for this convenience is the chance that your money can simply vanish.

Bitcoin is frequently criticized for the electricity costs required to mine new coins, but the reality is that these costs are required to incentivize miners to act in good faith, thus maintaining the integrity of the entire Bitcoin network without the need of a centralized leader who can dictate terms to all users. It would be a shame for these costs to be for nothing as users fail to take advantage of this system’s substantial benefits. However, as the price of bitcoin staggers from the FTX crisis, it seems that this will be a good opportunity to relearn some of the bad practices that have become endemic. Despite all sorts of nay-saying and doom predictions from much of the media, the hardened core of Bitcoiners know that the community has survived worse crashes than this and that bitcoin will come back better than ever. In the meantime, this is an opportunity to remember the transformative power of bitcoin and how ordinary people can engage with it in a sovereign way. The first step lies in self-custody. The FTX crisis reminds everyone of Bitcoin’s roots and how to build a strong foundation of bitcoin ownership with self-custody.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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