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What Binance’s Crash Tells Us About Centralized Exchanges

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Binance made headlines on May 19, 2021 when the centralized cryptocurrency exchange crashed for over an hour. This crash left users unable to access their account, which resulted in many users being forced to close out positions they would otherwise not close out. 

Anyway, this article will discuss the implications of this crash on centralized exchanges as a whole and what the fallout from the crash means for Binance. 

What Caused The Binance Crash?

The Binance Crash that occured on May 19, 2021 was caused by extreme trading volume on the platform due to the sharp decline in price that Bitcoin experienced. Binance servers were not equipped for the sudden price decrease and all users were barred from signing onto the exchange.

Centralized exchanges having big pricing problems during high volume (and volatility) trading times is actually somewhat common. 

There is actually a meme about Coinbase crashing anytime Bitcoin experiences a significant price increase or decrease. 

However, this is the first time that Binance has experienced a major crash. Fortunately, the crash only lasted one hour, which is a relatively short amount of time compared to other infamous exchange crashes. Still, one hour was all it took for the price of Bitcoin to fall enough that users trading with leverage were liquidated. 

The Risks of Using a Centralized Exchange

The Binance crash highlights one of the risks of using a centralized exchange – not being able to access your cryptocurrency when necessary. Unfortunately, this is not the only problem with centralized. In this section we will cover some of the many risks of using a centralized cryptocurrency exchange. 

Server Outage Prevents Access To Your Account

The first problem with keeping your cryptocurrency on a centralized exchange is that a server outage, like in the case of Binance, will prevent you from accessing your account. 

Now, you might wonder why being unable to access your account is a problem. 

Well, access to your account is not a huge problem if you simply plan on holding the cryptocurrency forever. But if you are a leveraged trader, then access to your account is absolutely critical. 

The reason is that a leveraged trader has a certain amount of time to add more money to their account before they get liquidated. The problem with a server outage is that leveraged traders cannot add funds to their account, so the are much more likely to get liquidated. 

The good news is that this problem can be avoided by not using leverage, which we recommend. The bad news is that most people do not listen to that advice, use leverage, a server outage like this happens, and they lose a lot of money.

The Exchange Does Not Allow Withdrawals 

The other problem with using a centralized exchange is that the possibility exists for them to not allow you to withdraw your cryptocurrency. This could occur because of “identity verification” issues, the exchange is a scam, or the hacking of your account. 

The reason does not matter – the outcome is always the same. The cryptocurrency you believed was yours is not actually yours until you own the private keys for the wallet.

To summarize, not your keys; not your crypto

Victims Attempt To Sue Binance

A few victims have attempted to sue Binance. Obviously, lawsuits take a long time to work through the court system. 

This has been made even more difficult by the fact that Binance is a rather difficult company to pin down for a lawsuit. The terms of service state that a complaint must go through Hong Kong, but this will likely be more difficult than suing an exchange based in a country like the United States or the United Kingdom. 

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Basically, we are saying that the lawsuit will most likely go nowhere. The good news is that Binance has offered an undisclosed amount to at least some of those users that had a financial loss due to the outage. Sadly, we are almost certain the amount Binance has offered is less than the amount the users lost due to the crash.

Has Binance Recovered From The Binance Crash of May 2021?

Binance recovered perfectly fine from this crash. In fact, we would assume that most Binance users are unaware of the crash that occurred two months ago. 

We will put it this way, most people know that centralized exchanges are not ideal. Sadly for them, there is not really a good alternative to a centralized exchange, so users must choose one. Most users go for a somewhat reliable one that has low fees, which often ends up being Binance. 

Decentralized exchanges do exist, but they are not really viable competitors to a major centralized exchange like Binance at the moment. This will likely change in the future as the transaction fees on Ethereum continue to go down. 

Don’t Use Leverage

One other important thing to note about this crash – don’t use leverage. It is bad because a scenario like the one described could happen on rare occasions. 

More often, however, is that you will simply be liquidated when the price of crypto collapses. And yes, the price of crypto always collapses in the short term and moons in the long term. 

This makes leverage a terrible move because you will lose out during the downswing before the next bull run. 

No amount of leverage is safe, either. Even using 2x leverage would still have wiped you out during the Binance crash in May. 

Cryptocurrency is simply too volatile of an asset for leverage to make any sense. It is also too good of a long term asset to risk being wiped out during one of the downswings. 

To summarize, avoid leverage at all costs. You are better off holding cryptocurrency for as long as you possibly can.  

Closing Thoughts

The Binance crash back in May shows us a few things about centralized exchanges – you can’t trust them and filing a lawsuit against a centralized exchanges that does not have a real headquarters is nearly impossible. The crash of Bitcoin during that time also proved that even a small amount of leverage (ie. 2x leverage) can still be liquidated. 

Sadly, the Binance outage will not do anything to stop the growth of centralized exchanges in the short term. There simply is not a viable alternative to a centralized exchange, but this will likely change as the DeFi exchanges on Ethereum begin to grow in popularity. 

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