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A popular cryptocurrency exchange announced on Sunday that it is blocking a type of high-risk trade that is blamed in part for the sharp fluctuations in Bitcoin value. casino-like atmosphere on such platforms globally.
Exchange FTX’s move will cut the amount of leverage it offers from 101x to 20x, reducing the size of the bets traders can make. Leverage increases traders’ chances of not only profit but also loss.
Sam Bankman-Fried, 29, the billionaire founder of the platform operating in Hong Kong, said, “We will be the first to take the step here.” He said on Twitter on Sunday. “Today we are removing high leverage from FTX. The maximum allowed value will be 20x.”
The announcement came after The New York Times, In an article published online on Friday, detailed risky transactions offered on FTX and other global exchanges such as Binance and BitMEX, which precipitated a global crash in May. That month, more than $20 billion of those bets were liquidated on cryptocurrency exchanges worldwide.
Mr. Bankman-Fried said that lowering leverage was “a step in the direction the industry is going and has been heading for some time”, adding that “although we think most of the arguments are high leverage, we’re missing the mark. I also don’t think it’s an essential part of the crypto ecosystem, and in some cases a healthy part of it.” neither.”
Global platforms like FTX allow traders to borrow large sums when betting on price fluctuations – traders don’t buy and sell cryptocurrencies, but instead predict where prices on underlying assets will go. These bets, known as derivatives, allow them to bet on the future price of $101,000 worth of cryptocurrency in FTX, with the exchange giving them credit if investors deposit $1,000. Now, with the new cap, the maximum amount on this transaction will be $20,000.
This type of trading is not supposed to be available to non-professional traders in the United States, but – historically at least – some of these investors have used workarounds to trade on the sites.
Leverage leaves investors much more vulnerable to liquidation as a result of an automated margin call if the cryptocurrency’s price goes against their predictions and they do not have enough collateral in their account to support their bets.
That’s what happened in May. When crypto prices began to fall due to market moving events like China’s announcement of a regulatory collapse or Tesla’s decision to halt Bitcoin payments, exchanges automatically led exchanges to liquidate the accounts of the highest leveraged investors before their collateral became insufficient. to cover their position.
“These liquidations are clearly a big factor in the price crash,” said Clara Medalie, research lead at Kaiko, a cryptocurrency market data provider in Paris, recalling the sudden drop in cryptocurrency value in mid-May. “It’s a vicious circle.”
Mr Bankman-Fried said on Sunday that only a small percentage of traders are taking advantage of the maximum leverage available. He also argued that FTX has fewer liquidations than other exchanges and has long sought to “promote responsible trading.”
Still, he predicted in an interview last week that some investors might not welcome any move to reduce leverage. “If we got rid of that, we’d get a backlash from consumers and we’d get a lot of bad press,” he said. “But it might be the right thing to do.”
Mr Bankman-Fried also acknowledged that high leverage creates a perception that exchanges like him encourage risky trading, although he argues that this is not a fair outcome.
Binance, the world’s largest cryptocurrency exchange, offers leverage up to 125x. Changpeng Zhao, the Chinese-Canadian founder of Binance and a developer who traces his professional roots to Wall Street, said the excessive leverage figures are just a “marketing gimmick” and most traders don’t use them.
Timothy Massad, former head of the Commodity Futures Trading Commission, which regulates derivatives in the United States, said that FTX has embraced its decision and hopes other platforms like Binance will follow suit.
He said the change could be due in part to this success of FTX. raising $900 million last week in venture capital, the best ever for a cryptocurrency exchange. Mr. Massad said that highly leveraged offerings in FTX are more of a reputational responsibility as Mr. Bankman-Fried seeks to expand the global reach of his platform.
“Sam has bigger visions and this move removes a flashpoint that might get in the way,” said Mr Massad. “Get it off the table.”
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