One of the biggest debates going on right now in the crypto world centers around Binance (BNB 4.61%), the world's largest cryptocurrency exchange. In the wake of the meltdown of Binance rival FTX, a tremendous amount of fear, uncertainty, and doubt (FUD) is now swirling around Binance. The insinuation, of course, is that Binance could be the next domino to fall.
Against this backdrop, the founder and chief executive officer of Binance, Changpeng "CZ" Zhao, has been publicly taking dramatic steps to quell investor concerns. He has attempted to showcase how Binance is a trustworthy business built for the long run. But questions persist. So is Binance a buy right now?
Transparency and accountability
Most assuringly for investors, Binance has emerged as a champion of transparency and accountability for crypto institutions. Over the past month, Binance has repeatedly called for more oversight, more regulation, and more safeguards for retail investors. The goal, says Binance, should be "stable and clear" regulations for crypto.
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Moreover, Bitcoin has shown a remarkable amount of transparency when it comes to its own financial health. Just recently, Binance conducted a third-party audit of its Bitcoin holdings, and the results showed an overcollateralization of Bitcoin held on the trading platform. So this addresses some of the concerns about a bank run on Binance -- as there was on FTX -- that drains it of liquidity. Although there are some concerns about just how comprehensive this audit was, it still shows that Binance feels it has nothing to hide.
Diversified Binance ecosystem
Also, a major point in Binance's favor is that it has broad diversification and protection from systemic risk, due to a sprawling, worldwide ecosystem. What many casual investors might not realize is that Binance is both a cryptocurrency exchange and a blockchain ecosystem. This is very different from, say, Coinbase Global, which exists only as a cryptocurrency exchange. So, not only do you gain access to the largest cryptocurrency exchange in the world by investing in Binance, you also gain access to the full upside potential of everything being built on top of the main Binance blockchain.
To give you an idea of just how extensive this ecosystem is, consider that Binance has been at the center of just about every major crypto event of 2022. When financial institutions looked for ways to help Ukraine in February, Binance led the way. When Terra Luna burned to the ground in May, Binance offered to list Terra Luna 2.0 on its exchange. When FTX imploded, Binance offered to provide needed liquidity to the marketplace. And Binance even found a way to get involved in Elon Musk's $44 billion acquisition of Twitter, providing $500 million in financing.
Too big to fail?
When investors talk about the traditional financial system, they usually talk about some institutions being "too big to fail." The same phenomenon could be emerging in the crypto industry. The crypto market can absorb the collapse of FTX, as well as the crash of a number of high-profile cryptos. But Binance is simply too big to fail. If you take down Binance, the whole crypto market comes down with it. So, while this is pure speculation, I think that regulators, government authorities, or a mix of crypto financial institutions would step in at some point to prevent a full, complete Binance meltdown.
Of course, this doesn't mean that Binance can't fail. Remember -- a lot of experts thought Lehman Brothers was "too big to fail" back in 2008, and look at what happened -- Lehman failed, a key event that triggered the financial crisis. And Binance has plenty of paths to failure. For one, there is speculation that U.S. officials could be going after Binance for money laundering activities. There is also speculation that Binance USD, the official stablecoin of the Binance ecosystem, could implode and bring down Binance.
A risky long-term bet
At the end of the day, the decision to invest in Binance is really a bet on the long-term future of crypto. If you think the industry's biggest players are going to survive the crypto winter, then Binance is worth a closer look. Binance is the crypto industry's behemoth right now, as well as the fifth-largest crypto by total market capitalization.
That said, I will need a little more hand-holding before I can recommend Binance as a long-term buy. With the arrest of Sam Bankman-Fried in the Bahamas, things in the crypto world have taken a much darker turn, and nobody can confidently say what's going to happen next. While I generally think much of the FUD surrounding Binance is overblown, you know what they say: Where there's smoke, there's fire. While I'm still investing in cryptocurrencies, I'm no longer investing in cryptocurrency exchanges.
