Foreign What's up guys, and welcome back to Wall Street Millennial On this channel, we cover everything related to stocks and investing. With the recent collapse of FTX Block Fight and other crypto exchanges, there are growing concerns that no crypto exchange is safe. Prior to November of this year, almost nobody expected that FTX would. Collapse By the time most people figured out that something was wrong, it was too late as their funds had already been frozen.

So instead of looking at crypto firms which have already collapsed, it's more important to look at exchanges that are still operating and try to judge beforehand. What is the level of risk? Currently the largest crypto Exchange in the world by far is Binance. For the first nine months of 2022, Binance processed almost 5 trillion dollars of transactions, making it more than five times larger than the second biggest exchange Okx, and almost eight times bigger than FTX. In fact, Binance is likely to gain even further market share as one of their biggest competitors FTX no longer exists on the surf.

This There are a lot of similarities between Binance and FTX. Both of them have their own native tokens BNB for Binance and Ftt for FTX. Both of them allow their users to trade complex and risky crypto derivatives. Both of them offered ways for users to earn yield on their crypto.

And finally, Binance was an early investor in FTX helping to get the exchange off the ground in 2019.. in this video, we'll have a look at how Binance grew to be the largest crypto Exchange in the world. What exactly was their relationship with FTX and whether or not they face any risk of bankruptcy. While crypto has taken most of the oxygen from the newsrooms recently, it's important to realize that there are tons of other opportunities for forward-thinking entrepreneurs.

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This way, no single government could shut the entire company down. Even by 2017, the cryptocurrency market was already very competitive with dozens of large exchanges. Binance had two major differentiators. Firstly, they offered a much larger selection of all coins than most other exchanges, and today they currently Support over 600 coins more than double what coinbase offers.

The second differentiator of Binance is the insane amount of Leverage that they allow their users to take on. In 2019, they launched Perpetual Futures contracts which allow users to take on up to 125 times leverage on Bitcoin. Many Crypto Traders are risk loving and want to take on as much leverage as possible to get the greatest opportunity for upside. In practice, this Leverage is achieved with something called a Perpetual Futures Contract.

Let's say there are two Traders on Binance Alice and Bob Alice thinks that the price of Bitcoin will go up and wants a long position. Bob thinks the price of Bitcoin will go down and so once a short position. so they enter into a contract with each other covering one Bitcoin The price of Bitcoin starts off at ten thousand dollars per coin. Let's suppose that on the first day Bitcoin Falls by one percent Alice then has to pay Bob 100, Alice and Bob are just sending money to each other each day based on the prices observed in the market.

Neither of them even have to own any Bitcoin. The reason is called Perpetual is because the contract between Alice and Bob has no expiry date. It will continue until either one of them decides to pull out, or if one of them goes bankrupt. In the case of an unlevered Futures Contract the probability of either party going bankrupt is very low.

Both Alice and Bob are required to put up ten thousand dollars in as collateral. Alice's account can never go bankrupt because the price of Bitcoin cannot go negative. Bob would only go bankrupt if the price of Bitcoin doubles, which could happen, but the broker would be able to liquidate him well before this. Things get a lot more interesting when you have 125 times leverage, which is the maximum that Binance allows you to take on.

It works in the exact same way, except you multiply the gains and losses by 125. if the price of Bitcoin Falls by one percent, Alice makes a 12 500 loss and Bob makes a twelve thousand five hundred dollar gain. The problem is Alice only has ten thousand dollars of collateral and so she is not able to pay Bob the full amount that he has owed after wiping out her collateral. Alex has an account balance of negative two thousand five hundred dollars.

But realistically, there's no way to collect on this negative balance. so Binance is forced to take a two thousand five hundred dollar loss to make Bob whole. Of course, Binance doesn't want to take any losses, so they have systems to liquidate the positions before either part is a comp balance goes negative. Of course, building out the infrastructure to do all of this costs money.

To this end, they raised 15 million dollars from the public with an initial coin offering of their native Binance token called BNB. There's been a lot of debate recently about whether or not cryptocurrencies should be considered. Securities In the case of BNB, it is clear that it is a security. Binance specifically said that they would use the proceeds of the Ico to upgrade their transaction infrastructure and to fund marketing campaigns that's similar to what a company would do with its IPO proceeds.

The only difference is Binance did not have to go through the regulatory process of a traditional IPO. Regardless of the lack of regulatory oversight, the BNB token has been a huge success for anyone who bought it at the Ico. At the time of recording this video, the price of BNB has increased more than 1900 fold from 15 cents to almost 300. Binance offers discount transaction fees to customers who hold BNB token.

Thus, demand for the token has increased as more people started using the platform. Secondly, Binance allocates 20 of its profits to buying BNB tokens from the market and burning them. Since 2017, they've bought back 20 of the outstanding Supply in 2019. Sam Bankman Freed founded his own cryptocurrency exchange.

FTX In a lot of ways, FDX followed similar strategies to Binance. They too offered their customers huge amounts of Leverage They too created their own native token called Ftt, which customers could use to get discounted transaction fees. FTX used one-third of their trading fees to buy back Ftt tokens from the market and burn them. This made Ftt tokens functionally similar to equity ownership in the company, as the more fees that FTX generates, the more Fct will be worth.

In order to do a successful Ico you need to build credibility within the industry. FTX Did this by securing a 100 million dollar investment from Binance. In exchange, Binance received common shares in FTX as well as Ftt tokens. Besides the 100 million dollar investment, Binance also helped FTX by allowing it to list some of the leveraged coins on the Binance exchange.

Over the next year, Ftx's growth surpassed all expectations and they became a formidable competitor to Binance. At this point, CZ started to view FTX as a threat and his relationship with Sandbankman Free deteriorated significantly. Binance delisted the FTX leverage tokens, claiming that they were too risky for most Binance customers. A few months later, Binance released its own leverage tokens that were just as risky as Ftx's You can check out this video we made about it at the time Link in the description below.

Also, throughout 2020 and 2021, Sam Makeman Freed spent tens of millions of dollars donating to U.S politicians and had numerous meetings with U.S Regulators He was trying to shape crypto regulations in such a way that would benefit FTX potentially at the expense of offshore competitors like Binance. And the span of less than three years, Binance had turned from an early backer of FTX to its biggest business rival, and luckily for CZ he had a trump card at his disposal. On November 2nd, 2022, Coindesk released an article claiming that Alameda research Sbf's hedge fund held over 5 billion dollars worth of Ftt. Much of it was labeled as collateral, which we later found out was collateral for their loans from FDX If the price of Ftt decreased significantly, FTX could be pushed to bankruptcy.

Remember that Binance acquired a significant Equity stake in FTX in 2019 in exchange for their 100 million early investment. In 2021, they sold the equity stake back to FTX for 2.1 billion dollars a 21 times return from their initial investment. Part of this 2.1 billion dollars came in the form of Ftt tokens. This put them in a position where they held an estimated five percent of the total supply of Fct tokens outstanding.

In light of the coindesk article, CZ Tweeted on November 6th about his intention to dump the entire stake in Ftt. This would have the effect of tanking the price at least in the short term, and it looked like the decision to liquidate their Ftt Holdings was not purely Financial In a tweet, CZ said that Binance won't support people who Lobby against other industry players behind their bags. he's referring to all of Spf's lobbying activities in. Washington DC After CZ announced his intentions to dump Ftt, the token's price declined by 16 from 25 to 21.

By this point, alarm Bells started to sound off within. Alameda Alameda CEO Caroline Ellison Tweeted that she would be happy to buy all of Binance's Fct tokens for 22 each. By tweeting this, she hoped to reassure the market about Alameda's financial position. Of course, this was a desperate love.

Alameda was already massively over leveraged and had been hemorrhaging cash due to their poor. Investments Binance dumped their coins on the open market, causing the price to collapse and triggering a solvency crisis at both Alameda and FDX. After the collapse of Ftt, Binance offered to acquire FTX pending due diligence. SBF said the Binance deal would help them clear out their withdrawal back, log and cover all customer deposits one to one.

At this point, it looked like CZ had made a genius business move by dumping his Ftt at a time of peak stress. for FTX they could cause a liquidity Crunch and swoop in to buy the Rival exchange on the cheap. further consolidating Binance's dominance in the industry. With the backing of Binance, people would have confidence in FTX again and continue trading on the platform and generating transaction fees.

However, such a strategy would be predicated on FTX being a legitimate business with a minor liquidity crunch. After less than one day of due diligence, it became clear that the issues at FTX were far bigger than this tweet. And then he wanted to talk. So at the beginning I thought he would just wanted to, you know, do a buyout on, do an OTC deal to buy out the Ftt tokens we had and then he wanted actually a buyout of the entire firm, uh, of that entire FTX platform and then um.

But then we got our team on it. It was pretty clear pretty soon that there's you know, um, this misappropriation of user funds. um, the user funds are gone. Um, and um, at that point, um, it's clearly that he lied to his users, his investors, his VC investors.

um, his employees. At that point I thought I couldn't like whatever data that's in the data room. we couldn't trust anymore. So it's quite hard for us to do that due diligence, so we didn't go very far.

The Binance acquisition was Sam Bakeman Freed's last desperate attempt to keep the House of Cards standing. When this failed, his whole empire imploded. Now that FTX has collapsed. the next question on many investors Minds is whether Binance could be the next shoe to draw.

And on the surface it looks like Binance is very risky. Remember that they allow users to take on as much as 125 times leverage with their Perpetual Crypto Futures contracts. In his recent interview at the New York Times Deal book, Summit SBF tried to blame the collapse on excessive leverage in open Futures positions. However, this was just a desperate obfuscation.

There's no way for a Leverage Features positions to cause a collapse like the one we saw at FTX. Remember that a Futures Contract is just a contract between two counterparties. Let's go back to the example of 125 times leverage on a Bitcoin Futures Contract With Alice going long and Bob going short, each of them has ten thousand dollars in collateral if the price of Bitcoin decreased by one percent. Alice owes Bob twelve thousand five hundred dollars.

but she only has ten thousand dollars of collateral, so the exchange has to eat the remaining two thousand five hundred dollar laws. Let's say that a lot of these liquidations happened all at once, so Binance was not able to cover all these negative account balances. In this case, Bob would only receive ten thousand dollars of profit. This is technically a default by The Exchange because Bob is only getting ten thousand dollars instead of the twelve thousand five hundred dollars that he has owed, but he still has a profit.

just a smaller profit than he should have. But there is no scenario in which any customer would lose their principal position inappropriately. The problem at FTX isn't that there was leverage in the system. The problem was that customer funds that should never have been lent out were lent out.

So long as customer funds are not being mishandled, customers using large amounts of Leverage shouldn't be a problem, and CZ claims that customer deposits are backed up once, one by assets and are not commingled. Binance does publicly disclose the wallets which hold their users crypto so anyone can see them. As of November 10th, they had 4 475, 000, Bitcoins 4.8 million Ethereum, almost 40 billion dollars worth of stable coins, and 58 million BNB Across all the 600 coins they offered, they have 69 billion dollars of assets. While it's relatively easy to prove how many of these assets you have, it's harder to prove your liabilities.

Just knowing they have 69 billion dollars of assets isn't enough information to tell if they are solvent. We also need to know their aggregate amount of liabilities. In order to answer this, they hired the French auditing firm Nazars to conduct a Proof of Reserve's audit, which was released on December 7th. Mazars found that total customer Bitcoin deposits were one percent less than Binance's total Bitcoin Holdings Some users have negative account balances, which means that they have borrowed crypto from other users.

Binance maintains that these loans only come from users who voluntarily sign up for Binance earned feature. Depositors who don't use the urine feature should have zero default risk. Also, the yields offered by Binance aren't crazy high. Their yield on their stablecoin busd is six percent Which is higher, but not insanely higher than the four percent apy you can get on FDIC insured savings accounts.

Binance's interest rates are far more believable than the eight percent that FTX was offering last year, back when the Federal Funds rate was Zero. While there are no obvious red flags with Binance, we can't know for sure that it's completely safe. The Proof of Reserves audit by Nazars only looked at their Bitcoin Holdings Binance says that they plan to conduct similar audits for the rest of the cryptocurrencies on their platform, but as of the time of recording this video, this has not yet happened. One silver lining of the FTX implosion is that has caused a significant amount of fear, uncertainty, and doubt across the entire industry.

ready. This has forced many exchanges like Binance to conduct Proof of Reserve's audits. Being audited by an external auditor is not a 100 foolproof way to prevent fraud. Enron Wirecard and Luck and Coffee all had their financial statements audited.

but it's undeniable that there's a lot more fraud going on in the crypto world today than there isn't a traditional financial markets. Crypto has been the wild West and Regulators have time and time again shown a gross inability to prevent fraud. FTX had a huge number of red flags, including unbelievably high yields a CEO who played League of Legends during investor calls, a failure to ever show proof of reserves, and most importantly, a related party hedge fund run by a 28 year old drug user. Binance has none of these red flags and to give credit to CZ he was able to see that SPF was a con man before most other people.

That's why he dumped his Ftt tokens on November 6th right before the price crashed. So if you use Binance to trade crypto, you're probably safe. As a quick disclaimer, nothing in this video is investing advice on this channel. We have been consistently skeptical of all things related to crypto and you can see this in our historical videos.

I Personally have never made a material investment in any cryptocurrencies and have no plans to ever do so. The entire selling point of Crypto is that as an alternative to the traditional Finance industry, especially after the 2008 financial crisis, many people have felt the cards are stacked against them. excessive risk taking by Wall Street crash the economy, putting tens of millions of people out of work at no fault of their own. Things like the Wells Fargo fake account Scandal have further reduced trust in both Wall Street and Main Street Banks.

The idea of crypto is that people can send and receive money to each other peer-to-peer without the need of a middleman collecting exorbitant fees in between. This crypto Utopia is only possible in theory the vast majority of people don't have the expertise or time to hold crypto in their own private wallets and transfer them peer-to-peer every time they go to the grocery store. So they end up using centralized exchanges. and has become painfully obvious that these centralized crypto exchanges are even more corrupt than the traditional Financial system because there is less regulation.

A lot of people complain that no Wall Street Executives went to jail after the 2008 financial crisis. As of the time of recording this video, do Quan The Mastermind behind the Terra Luna disaster, Suzu, the founder of Three Arrows Capital and Sam Bakeman freed are all free men. Of course, not all crypto exchanges are bad. Just like not all traditional banks are bad, but on average, the crypto industry tree is far more shady.

Bitcoin was founded 14 years ago and since then there's been an explosion of so-called innovation in the industry. Despite this, the system is inferior on almost every metric to the traditional Financial system that is designed to disrupt. at some point you have to cut your losses and give up. Bitcoin has lost two-thirds of its value over the past year.

If I owned any Bitcoin which I don't I would immediately dump it to save the last one third of value while I still can't Alright guys, that wraps it up for this video. What do you think about Binance in the crypto industry in general? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.