Binance in Troubled Waters: Crypto Analysts Spot Signs of Liquidity Decline

The term “liquidity risk” describes the inability to promptly sell or buy a security or asset in order to avoid or reduce loss. Large price swings generally cause it to be reflected. To put it simply, liquidity risk is the probability that a corporation or individual trader won’t be able to sell their asset for cash and fulfill their immediate financial obligations.

Liquidity risk typically occurs when an asset’s illiquidity or the market’s inefficiency prevents immediate financial needs from being met.

A Look Into Binance’s Troubling Sign of Liquidity Loss

In light of the liquidation risks associated with incorporating blockchain technology, Binance, the top cryptocurrency exchange, seems to be experiencing a fall in liquidity.

According to a report by the crypto analytics company Nansen, Binance experienced net withdrawals of more than $3.6 billion between December 7 and December 13. Gross outflows from Binance have amounted to about $8.8 billion, while gross inflows are about $5.1 billion.

Furthermore, whereas Binance had daily net inflows of more than $2 billion in Ethereum ERC-20 tokens in November, this flipped into outflows of more than $1 billion from December 12–13.

Andrew Thurman, a Nansen technician, believes that the departure of significant market makers from the exchange may have contributed to the decline in liquidity. According to Thurman’s study, Jump Finance redeemed approximately $30 million in Binance USD (BUSD) between December 12–13, and Wintermute withdrew over $300 million on December 11–12.

By volume, Binance is the biggest cryptocurrency exchange in the world, yet on December 12 a report indicated the U.S. The Department of Justice is considering filing financial crime charges against top executives. Although the Department of Justice has not made a formal statement regarding the situation, Binance has asserted that the report is “false.”

Binance CEO Changpeng “CZ” Zhao responded to the outflows by asserting that the situation would be advantageous for the exchange because it will act as a “stress test” to demonstrate Binance’s financial stability.

Despite this optimistic outlook, Binance’s own teaching materials say that insufficient liquidity can result in wider bid-ask spreads and more slippage, both of which can be detrimental to clients.

The Takeaways

Because Binance may be exposed to liquidity risk, it’s critical to keep in mind that in the cryptocurrency world, you must be at ease with the idea of temporary loss and perform some test calculations before you enter any liquidity pool, taking into account both the rewards that you generate over time. Additionally, consider your meta-strategy in advance as well as the general crypto market environment.

In conclusion, I want to add that this is purely my subjective opinion and in no way is it financial or any investment advice. Before making any decision, make sure that you have done a thorough study of each digital asset mentioned and familiarize yourself with the potential risks that the crypto markets bring. Beware, crypto markets are very volatile! DYOR!



Writer | Cultural Activist | Violinist

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store