Why Is Bitcoin Down Today?
GettyBitcoin is in the red today after the Securities and Exchange Commission (SEC) announced legal action against Binance and its founder Changpeng Zhao.
Binance is the biggest crypto exchange in the world, and it operates internationally as Binance.com and in the U.S. as Binance.US. Users based in the U.S. are barred from using Binance.com, and the SEC alleges that Binance and Zhao violated securities laws by allowing U.S. customers to trade on Binance.com despite the ban.
The SEC also alleges that the companies comingled billions of dollars worth of user funds—similar to activities that helped bring down FTX—and sent them to a European company controlled by Zhao.
In one instance, Binance’s chief compliance officer messaged a colleague that, “[w]e are operating as a (vulgarity) unlicensed securities exchange in the USA bro.”
BTC is down nearly 5% as of midday, while Ethereum (ETH) is down 4%.
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Bitcoin Has Struggled This Month
Back in early May, Binance froze withdrawals of Bitcoin twice in one week due to “congestion” on the cryptocurrency’s blockchain.
A blockchain is where all of the transactions for a given cryptocurrency are recorded. Congestion on Bitcoin’s blockchain reportedly came from a growing volume of transactions in so-called “meme coins.” These cryptos can piggyback on the original blockchain and lead to higher transaction fees.
Due to the added volume on Bitcoin’s blockchain, Bitcoin miners, the people who verify transactions on the blockchain, started charging higher transaction fees, and crypto exchanges’ withdrawal fees couldn’t keep pace. This led to a slowdown in processing times for exchanges like Binance, hence the “congestion” to which the exchange referred.
Reportedly Binance froze Bitcoin withdrawals to provide miners with extra time to catch up with a backlog of transactions.
Binance first paused withdrawals for around 90 minutes. The exchange later paused withdrawals again for an additional two hours.
What Caused BTC’s Network Congestion?
A Bitcoin developer released a new protocol, known as Ordinals, earlier in 2023 that allowed for the minting of non-fungible tokens on the Bitcoin network. This same protocol also gives developers the ability to mint meme coins such as the new Pepe Coin (PEPE) on the network.
The ability to add NFTs and meme coins to the Bitcoin network has increased the number of transactions on the cryptocurrency’s underlying blockchain. This increase in transactions was not something for which Bitcoin’s miners were prepared.
As a result, the network slowed down due to an increase in processing transactions. This increase in processing times also caused the fees charged by Bitcoin miners to go up. Crypto exchanges’ withdrawal fees did not keep pace.
Unlike other blockchain networks, such as Ethereum, Bitcoin was not originally designed to handle this kind of uptick in transactions. BTC was developed as a medium for payments and store of value.
Is There More to the Story?
Not all experts believed Binance’s claim that the sole reason for shutting down withdrawals was due to network congestion, however.
Some crypto insiders pointed to Binance moving approximately $4.4 billion in BTC across its crypto wallet system. These insiders pointed out that this could be a sign of insolvency or legal risk.
For its part, Binance claims that the move was merely an attempt to secure the company’s BTC in offline (cold) storage wallets rather than online (hot) wallets.
Since there is no way for outside parties to access offline wallets via the internet, cold storage is usually considered to be a more secure method for holding cryptocurrency. However, this also means that Binance customers can no longer withdraw these coins from the exchange.
For this reason, Nico Moran, creator and host of Simply Bitcoin, recommends that everybody who owns BTC transfer their currency offline immediately.
“The lesson always remains the same. If you’re not taking self-custody of your Bitcoin, it’s not your Bitcoin,” Moran says.
Is Cryptocurrency a Safe Investment?
Cryptocurrency markets continue to struggle this year despite a modest bounce higher in prices over the past few months. The rapid collapse of crypto exchange FTX, Binance’s top competitor, in November 2022 brought unwanted scrutiny to the industry.
U.S. regulators have cracked down on exchanges and other companies trading in and creating cryptocurrencies.
Most recently SEC commissioner, Gary Gensler, has claimed that his agency believes most cryptocurrencies are in fact securities and hence already fall under the purview of a plethora of already-existing legal precedents.
Gensler has also stated that Bitcoin itself is probably a commodity—not a security—and hence should be regulated by the Commodity Futures Trading Commission (CFTC), not the SEC.
These fears of regulations have led to everything from bank insolvencies, such as the case of Silvergate Bank, to U.S.-based crypto exchanges like Coinbase moving some operations overseas.
“Right now, you have lawsuits flying against Binance and Coinbase,” Moran says. “Binance is a black box. We have no idea what’s going on there. If you choose to leave your coins there, you do so at your own risk.”
Even after the recent price declines, Bitcoin is up nearly 60% year-to-date. Although BTC’s current price of $26,500 is still more than 58% below its all-time high of $64,400, set in November 2021.
