The Risks of Centralized Crypto Exchanges: A Closer Look
In November 2022, the fall of FTX exposed the risks associated with centralized crypto exchanges. Glassnode, an on-chain analytics provider, has developed an exchange risk framework to identify areas of concern. Here are the key points:
- Glassnode’s exchange risk framework uses FTX as a reference point for high-risk instances.
- The dominant exchanges in terms of BTC supply held are Binance, Coinbase, and Bitfinex.
- The ‘Internal Reshuffling Ratio’ is used as the first indicator to identify instances where the exchange balance has been transacted more than 100% within a week.
- The ‘Exchange Reliance Ratio’ measures the degree to which an exchange’s balance moves to or from other exchanges.
- The ‘Whale Withdrawal Ratio’ indicates when large entities are withdrawing at elevated rates.
Glassnode found that Binance and Coinbase have relatively low risk indicators and share a similar on-chain footprint. However, FTX serves as a prime example of risk indicators to watch out for, while Huobi’s declining exchange balance suggests caution may be warranted.
Hot Take: The Importance of Exchange Risk Assessment
The risks associated with centralized crypto exchanges cannot be ignored. Glassnode’s exchange risk framework offers valuable insights for crypto traders and investors. By monitoring indicators such as the reshuffling ratio, reliance ratio, and whale withdrawal ratio, you can assess the potential risks of an exchange and make more informed decisions. Remember, it’s crucial to prioritize the security and reliability of the exchanges you choose to trade on.
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