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Changpeng Zhao, Binance CEO and a person who is now considered one of the most influential personas in the whole industry, highlighted one important fact that cryptocurrency exchange users should see as a red flag.
It is the movement of large amounts of cryptocurrency from exchange-related addresses before or after they demonstrate their wallet addresses. Binance CEO's concern is more than justified. Usually, centralized exchanges that operate smoothly do not have to constantly move large amounts of funds during a period of high load.
If an exchange have to move large amounts of crypto before or after they demonstrate their wallet addresses, it is a clear sign of problems. Stay away. Stay #SAFU. 🙏
— CZ 🔶 Binance (@cz_binance) November 13, 2022
A flurry of large transactions toward an exchange is the first sign of active liquidation of the exchange's external holdings. Technically, cryptocurrency exchanges should not move users' funds outside of the platform's ecosystem since it creates liquidity risks.
Once an exchange's liquidity falls below a certain point, an unexpected spike in withdrawals will most likely cause a situation similar to FTX's. After a few failed withdrawals, panic in the community emerges and the liquidity crisis spiral accelerates, causing a congestion on the network and a complete halting of withdrawals.
Arman ShirinyanTo avoid scenarios described above, users should keep a close eye on operations in exchange-related wallets. If a series of suspicious transactions appear on the network, it would be a wise decision to move funds away from the trading platform and store them safely in a non-custodial wallet.
If you are willing to minimize exposure to the aforementioned risks, the safest way to do so is to move funds away from a centralized exchange to your own non-custodial wallet. By holding funds in your own wallet with your own private keys, you will avoid situations like the FTX liquidity crisis and inability to withdraw and use your own funds.
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