/biz/ - Business & Finance

The current risk is for an exchange heavily reliant on derivatives to go bankrupt if the price of the token moves too quickly and they don't have the spot token liquidity reserve to compensate for those moves.

FTX may have gone bankrupt partly because of derivative manipulation going against them, but this can still happen to another exchange with too many derivatives.

The FTX related group used paper derivatives to manipulate the price of crypto and tried to reproduce what they did to silver and gold.
However blockchain technology with self custody was created exactly for the purpose of making it easier to see who swims naked and to make these manipulations more difficult.
We saw a first result of a successful bank run against a cheating exchange with FTX.

A corrupt exchange can print an infinite amount of paper promises for a token but if everyone withdraws those tokens then they won't be able to survive if they cheated.

ETH and Bitcoin are in an interesting situation of having dangerously low exchange reserves.
This means that a smaller buying pressure can cause big price moves if there are no more sellers left.
Exchanges may not be able to cover their position on the derivative market in such a situation.

16.8% of the ETH supply is currently on exchanges and only 11.2% of the BTC supply is available.
When the short selling game ends some derivative exchanges could end up naked like FTX while the price goes up.

What goes down quickly can also go up quickly.