It’s no secret that cryptocurrency relies on some major centralized projects in order to operate. These projects are Binance and Tether. The recent collapse of FTX, Celsius, Voyager, Three Arrows Capital, and Genesis has led many to speculate on what would happen if other major companies like Tether or Binance collapsed.
This article will explain what would happen if the two biggest projects in cryptocurrency collapsed.
Tether Collapsing Would Decimate Cryptocurrency
For those unaware, Tether Limited Inc. is the company behind USDT. USDT is an ERC-20 stablecoin on Ethereum – 1 stablecoin equals 1 US dollar(source: WorldCoinStats.com). These coins can apparently be redeemed at a 1:1 ratio through Tether Limited Inc.
However, there’s a lot of speculation in the cryptocurrency industry that Tether Limited does not have enough reserves to cover all the USDT in circulation. This speculation is mostly fueled by the lack of Tether Limited having ever been audited by a reputable accounting firm. They have also been sued by the New York Attorney General because they had allegedly commingled customer funds with corporate funds.
The general consensus in the cryptocurrency industry is that Tether does not have fully backed reserves. There is no direct evidence of this, though. Despite these claims, Tether is still the third-largest cryptocurrency by market cap.
Many exchanges hold millions of dollars worth of Tether because they often have problems with bank accounts. Some exchanges even use Tether as a replacement for fiat currency because they don’t have to worry about licensing if they don’t accept fiat currency.
Tether collapsing would leave many exchanges holding a lot of worthless USDT. This would surely lead to the demise of many exchanges.
That’s not to mention the many decentralized finance protocols that use USDT as a replacement for digital fiat.
To summarize, the entire cryptocurrency industry would collapse if USDT loses its peg. And the chances of Tether collapsing are somewhat high.
Binance Collapsing is Not Likely
Binance is an exchange that many are looking at as another exchange that could collapse. They are the largest cryptocurrency exchange in the world, so its collapse would have a major impact on the cryptocurrency market.
The good news is that the chances of Binance collapsing are very low. The founder of Binance, Changpeng Zhao (aka. CZ), does a good job running Binance. They have not had any major issues in their 5 years of operation. More importantly, they have a Secure Asset Fund for Users with over 1 billion dollars in it that can be used in case something goes terribly wrong.
So, while Binance collapse would be catastrophic, the chances are so low that it’s really not worth worrying about or even considering.
Here’s Why Exchanges Collapsing Cause Crypto Price Crashes
It might sound a little counterintuitive – the collapse of exchange should not cause the collapse of cryptocurrency, right?
Not quite. Exchanges serve as a good barometer for trust in the cryptocurrency market. If an exchange collapses, then the market has way less faith in cryptocurrency.
It’s sort of similar to when a major bank collapses and the entire stock market collapse as a result. The bank did not cause the collapse, but investors get scared and pulled their money out of the market.
Bitcoin Will Recover
The silver lining with all this is that Bitcoin will recover. These centralized exchanges are not actually cryptocurrency – they are essentially crypto banks. They make transacting in cryptocurrency a lot easier, but they are not at all necessary for the ecosystem to thrive.
Some of these centralized cryptocurrency companies are basically the same scams that have been on Wall Street for over a century (Ponzi schemes). Someone simply did it using crypto rather than fiat currency.
Don’t let Ponzi scheme projects collapse sour you to cryptocurrency. The underlying technology of cryptocurrency is still solid and these centralized Ponzi schemes are in no way necessary for it to succeed nor are they a good representation of cryptocurrency.
Final Thoughts
To summarize, cryptocurrency is doomed if Tether or Binance collapses. Of course, it will recover on a long enough timeline, but it will take a long time before people start investing in cryptocurrency again after that.
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