In the wake of the collapse of FTX, the cryptocurrency community found itself in a tough position and with a newfound caution surrounding the stability of other major exchanges like Huobi, Coinbase, and Binance. As the community moves on, drawing insights from the collapse of FTX and applying them to other players becomes a necessary next step.
For this article, let’s look into indicators of exchange health presented by Glassnode, explore the potential vulnerabilities of centralized platforms, and talk about how Single Broker addresses them.
According to Glassnode, the era of Bitcoin’s meteoric rise saw a shift in the way we look at crypto exchanges. Centralized exchanges took center stage in the ecosystem when BTC’s popularity soared to unprecedented heights in 2018-2020. During this period, the movement of funds through deposits and withdrawals within these platforms accounted for 54% of the total on-chain value transferred in Bitcoin. In other words, exchanges were the biggest pathways for crypto transactions and money movement.
Looking back, it’s clear that certain exchanges had firmly established themselves as major players in the space. By 2019, Binance, Coinbase, and Bitfinex had become leaders in this field. Thanks to their strategic actions and careful management, they had sufficient Bitcoin holdings to match their status — Binance with 691,200 BTC, Coinbase with 439,800 BTC, and Bitfinex holding 320,700 BTC.
After the FTX crash in 2022, the recovery phase was an obvious example that CEX as a phenomenon is here to stay. Despite the controversies, exchanges remain the main entry point for digital assets, especially as more individuals and institutions get involved. For better or worse, they’re still the most popular platform type for digital asset transactions.
What if another exchange encounters problems similar to those faced by FTX? Now, CryptoVizArt (Glassnode Onchain Newsletter) suggests there are a few critical indicators that may reveal issues within centralized platforms before they follow the path of FTX:
When investors are concerned, they seek measurable factors to reestablish their trust. So, these indicators serve as alerts and help experts spot scenarios in which an exchange could be mishandling funds, heavily depending on other platforms, or experiencing major withdrawals.
Analysts then applied these indicators to real events. Before the FTX incident, there was an instance in which the reshuffling ratio surpassed the norm. This breach occurred between March 2021 and the crash in November 2022.
Binance’s reshuffling ratio displayed abrupt spikes during times of heightened market volatility, which indicated frequent deposits and withdrawals. Huobi had a similar pattern.
The reliance ratio showed the interconnection and trust between different exchanges. Binance and Coinbase showed minimal ratios; in other words, they were less reliant on other exchanges. In contrast, FTX exhibited strongly negative ratios (=significant asset withdrawals), and Huobi’s ratios indicated a net transfer of funds to external exchanges.
As for the whale withdrawal ratio, both Coinbase and Binance maintained exceptionally low ratios, while FTX’s ratio surged after the collapses of Terra and Three Arrows Capital and remained elevated until its eventual downfall. In the case of Huobi, there was a moderate level of risk, with a consistent increase in the whale withdrawal ratio.
So, CryptoVizArt and Glassnode experts have their eyes on the potential risks and stability of major exchanges, especially Huobi, Coinbase, and Binance. To reiterate — while Binance and Coinbase displayed low-risk patterns in various indicators, Huobi’s behavior suggested a moderate level of risk. And if you agree that indicators do offer important insights into how these exchanges operate, it’s important for you to stay cautious as well.
What about finding other ways to confirm that an exchange can be trusted? Well, audits may not do the trick. SEC’s Paul Manter warned investors to be very careful about relying on audits of crypto platform reserves. He pointed out that these audits might not always show the real financial condition of a company. Perhaps investors and experts should stick to their own methods to assess exchanges, with indicators of health being one of them.
In the volatile and dynamic world of cryptocurrencies, where exchanges can face vulnerabilities and uncertainties, a comprehensive platform like Single Broker steps in to provide traders with a resilient solution. It may not be able to prevent the downfall of the next FTX, but it can offer a strategic advantage.
For instance, in times of exchange risk, traders can shift their activities to alternative venues, thus reducing their exposure to a single point of failure. Even if a specific exchange experiences disruptions, continuity will remain. Moreover, the incorporation of decentralized finance tools, thanks to their self-executing nature, acts as another fallback option independent of exchange-related risks, while custody and insured customer accounts provide further security for investors’ assets.
In the end, don’t let your guard down, even with big market players. It’s paramount to remain vigilant and proactive in monitoring exchange health, as well as to spread your assets across different places. Just bear in mind that health index analysis does not guarantee absolute accuracy. To make sound investment decisions, it’s advisable to use additional methods alongside Glassnode’s findings.
Disclaimer: This article does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.