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A Note on Bailouts and Crypto Leverage

2022-06-23

As you all know, current market conditions are tough. With our position as one of the largest industry players with healthy cash reserves, we have a duty to protect users. We also have a responsibility to help industry players survive and hopefully thrive. This is the case even if there are no direct benefits to us or we experience negative ROIs. 

Having said that, the word “bailout” can have different meanings to different people. And as with most things in the real world, it’s not a binary situation. 

Not All Bailouts Are the Same

There are different types of “bailouts” for different situations. First, some companies/projects/products are: 

  1. Poorly designed (no product-market fit)

  2. Poorly managed

  3. Poorly operated 

In short, they are just “bad” projects. These should not be saved. Sadly, some of these “bad” projects have a large number of users, often acquired through inflated incentives, “creative” marketing, or pure Ponzi schemes

Further, in any industry, there are always more failed projects than successful ones. Hopefully, the failures are small, and the successes are large. But you get the idea. Bailouts here don't make sense. Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will. 

For users who fall victim to these, education is the best protection. We (industry players, schools, and governments) need to educate people on financial literacy, risk management, diversification, and, most importantly, how to evaluate fundamentals (users, revenue, etc.)

Some Projects Have Problems but Are Fixable

A second category includes projects that made small mistakes. They are either too aggressive on spending, have insufficient reserves, or have other minor fixable problems. These projects usually have some good qualities: product-market fit, generating revenue in normal market conditions, sound business models, decent teams, etc. 

These can be bailed out and subsequently ensure changes are made to fix the problems that led them to this situation in the first place.

Others Are Barely Surviving but Have Great Potential

The third category contains projects that will survive, but barely. They are tight on cash. They don’t have a sufficient budget to grow healthily anymore. They could either wait it out, get a cash injection, or explore M&A possibilities. Obviously, all of those make sense from a potential investor or acquirer’s point of view.

At Binance, our deals team kicked into high gear a few weeks ago. Many projects have come to us who want to engage and talk. Again, in real life, these categories are not clear labels. All projects view themselves as the third category, and we need to look at each project in detail to decide. There is some subjectiveness to it.

I believe a key difference between now and 2018’s bear market is that there is now more leverage in our industry. According to my definitions, there are two leverage types: fast and slow.

You’ll find fast leverage on centralized exchanges, often with futures products. These work, as you might guess, very “fast”. For example, on March 12, 2020, there were cascading liquidations on BitMex that caused bitcoin’s price to drop from $8000 to $3000 in one day. Pretty fast. The situation was, however, over within 24 hours. The next day, markets started to recover, and they never looked back. Exchanges are efficient in this way.

Slow leverage is when funds lend to other funds or DeFi protocols to invest. When one of these gets liquidated, the affected lenders typically take a few days or weeks to realize or admit the pain. These can also have a cascading effect, but the propagation speed is much slower. I believe we have not seen the end of these yet. Luckily, the more these cascading events happen, the number becomes smaller and more spread out.

So far, I believe the blockchain industry has shown tremendous resilience. If two years ago, on March 12, 2020, you told me bitcoin’s price would be $20,000 in June 2022, I would be pretty happy. So, why not zoom out for a more balanced perspective? With this in mind, let’s take the situation as a chance to reiterate proper risk management and educate the masses.

Read the following helpful articles for more information about Binance: 

Our Commitment to User Protection

(Blog) How Binance Works to Protect the Crypto Ecosystem

(Support) How to Manage Risk and Trade Responsibly