With all due respect, I would never put Binance and FTX on the same level, we're talking about two completely different exchanges and persons behind them. SBF came out pretty much from nowhere and in 1-2 years he already an exchange that was considered better than Kraken, Bitfinex, and other exchanges that have been online for a long time. I had some FTT but since the beginning everything looked too good to be true, with this young guy claiming to donate everything in charity etc etc. CZ makes a ton of money thanks to the commissions but he really bet everything on crypto and actually believe in them, SBF just used them to make more money, that's it, he never cared about this world.
I don't want to say that character counts for nothing, because that clearly isn't true and there may be a billion dollars or so lost in FTX due to people at the top more or less pocketing it. But the real implosion from FTX came from the nature of the business itself. They imploded because they extended margin to users and prices changed.
Lets imagine that tomorrow the price of bitcoin or some other cryptocurrency jumped to a million dollars a coin almost instantly and stayed there, or jumped to $5 per coin and stayed there (US says it's making Bitcoin legal tender vs US says its outlawing Bitcoin). What would happen to the solvency of the services?
A traditional Bitcoin exchange that doesn't have any funny business products would be unaffected-- other than increased or decreased activity might bring their revenue up or down (or cause their website to suffer from high traffic). One Bitcoin there is still one Bitcoin, one dollar is still one dollar. All is fine.
A Bitcoin options exchange that uses physically delivered (as opposed to cash settled) options-- again: everything is fine. Some traders will have bad or good days when positions move for or against them but every contract will be delivered as promised.
Now compare that to an exchange that offers leverage using paper bitcoins. They will go bankrupt and be unable to process withdraws in at least one of those scenarios, depending on if they were net long or net short.
Competent execution means that the third model can go longer, get bigger, handle higher volatility before imploding. If they have high fees to bilk the customers or manipulation to move the odds more in the houses favor, all can help. But the structure itself doesn't *guarantee* it won't implode and so it eventually will-- you just hope not in your lifetime, or not while you have funds on there.
Why expose yourself? The risks are opaque to you and it's not like you're getting revenue sharing. You can just choose to not do business with companies that have products that make them take on potentially unbounded liability.
It's not like they should be able to say anything to convince you-- FTX has long webpages about what would happen if their 'insurance fund' couldn't cover their needs and when push came to shove it was all meaningless. The incentives for the operators are generally to continue to crank the risk until they fail-- the risk is *your* risk, and they make more profit by cranking it up at least until the wheels come off.
The same think applies to blockfi, Celsius, gemini earn... 8%/yr for just depositing bitcoin? Yeah turns out that just handed your bitcoins over to "funds" that paid them 15%/yr and those funds just invested them in "defi" ponzi schemes paying 20%/yr. ... Schemes most people wouldn't fall for because the 20%/yr yield alone made it pretty clear what it was and what would happen. The primary business of these entities was just a whitewashing front to make obvious ponzis less obvious, skimming off half the rewards (but not taking the risk).
When you hand over your coins to some else you're getting a debt in return. In a non-debt economy you don't have to worry much about what your business partners are in. But when you're getting a debt from them you absolutely do. Some businesses are just bad and their badness is why they're willing to share them with you in the first place.
Badness is context specific. A stock brokerage can offer margin to retail -- subject to a huge amount of limitations including limiting leverage to 2x, limiting what assets you can use it for, etc. in huge, super diversified and mature markets where the underlying assets have real value, managed by risk managed experts, and backstopped by industry and government supported insurance. But none of that characterizes cryptocurrency market, especially the closer you get to shitcoins (because they're more volitile and more likely to turn out to be worth nothing by surprise, among other issues). Unregulated, irresponsible, many assets which have absolutely zero value but trade at inflated prices for long spans, insanely volitile ... and then people want to slather 5x ... 20x or more leverage on top, and not via schemes that can guarantee delivery.
Because the markets are so non-transparent honest players who try to do less risky stuff will just be out-competed by the manic that has snorted the longest line of cocaine.
It's insanity.
And no matter how competent you think someone offering that insanity is: they fundamentally can't be or they wouldn't be in such a dumb business to begin with... so if the signal about their competence is misleading what else might be being misread?
Fact is that a fair portion of people who become rich do so not because they're smart but because they're stupid -- they make the bad gambles that have good rewards because others weren't so foolish as to take them... and it works until it doesn't. That's clearly the business FTX was in (as shown by both Ellison and SBF posts about bet sizing), and you can reduce your risk of exposure by avoiding the businesses with bad models and obviously suspicious behavior and that's about all you can do because no one is going to just come out and tell you that their business is gonna gobble your money.
In some sense people are fortunate FTX was so incompetently run: If it were somewhat more competently run but still fundamentally based on a broken model then perhaps it could have ballooned to 10x its size* and caused a lot more damage when it imploded.
(*Keep in mind I think actual losses in FTX are probably overstated 3x - 20x; because they're counting paper bitcoin bought on margin they can't deliver as a liability. But the real loss is the money put in that can't be recovered, not the value of the levered Bitcoin users never really owned because it never actually existed.)
