A popular cryptocurrency exchange announced on Sunday that it was curbing some type of high-risk trading, partly due to the sharp fluctuations in the value of Bitcoin and the. is held responsible Casino-like atmosphere on such platforms worldwide.
Switching the exchange, FTX, would reduce the amount of bets investors can place by lowering the leverage offered from 101 to 20 times. Leverage multiplies the trader’s chance not only of profit, but also of loss.
“We will take the first step here,” said Sam Bankman-Fried, 29, the billionaire and founder of the platform, which operates from Hong Kong, on Twitter on Sunday. “Today we are removing the high leverage from FTX. The maximum permissible value will be 20x. “
The announcement came after the New York Times, in an article posted online on Friday, described the risky trades offered on FTX and other global exchanges such as Binance and BitMEX that accelerated a global crash in May. This month, those bets worth more than $ 20 billion were liquidated on cryptocurrency exchanges around the world.
Bankman-Fried said lowering leverage “is a step in the direction the industry has been headed and has been for a while,” adding, “Although we believe many of the arguments in favor of With high leverage, we don’t miss the mark either, believing it’s an important part of the crypto ecosystem, and in some cases it’s not a healthy part of it. “
Global platforms like FTX allow traders to borrow big when betting on price fluctuations – traders don’t buy and sell cryptocurrencies, but instead predict where the prices of the underlying assets will go. These bets, known as derivatives, mean that the exchange will grant them credit when they raise $ 1,000 so they can wager on the future price of the cryptocurrency worth up to $ 101,000 on FTX. Now, with the new cap, the maximum on this transaction would be $ 20,000.
This type of transaction should not be available to professional investors in the United States, but – at least historically – some of these investors have used workarounds to trade on the sites.
Leverage makes investors much more susceptible to their accounts being liquidated due to an automated margin call if the price of the cryptocurrency goes against their prediction and they do not have enough collateral on their accounts to support their bets.
It happened in May. When cryptocurrency prices began to fall due to market-moving events such as China’s announcement of regulatory action or Tesla’s decision to suspend Bitcoin payments, it prompted exchanges to automatically liquidate the accounts of the most leveraged investors before their collateral were no longer sufficient to cover their positions.
“These liquidations are obviously a big factor in the price crash,” said Clara Medalie, head of research at Kaiko, a provider of cryptocurrency market data in Paris, and recalled the sudden fall in value of the cryptocurrency in mid-May. “It is a doom-loop.”
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 had fewer liquidations than other exchanges and that he had long sought to “promote responsible trading”.
Still, he predicted in an interview last week that some investors would not welcome a move to reduce debt. “We’d get a consumer outcry if we got rid of it and we’d get very bad press,” he said. “But it could be the right thing.”
Mr Bankman-Fried also admitted that high leverage created the impression that exchanges like him were promoting risky trading, although he claimed it was not a fair conclusion.
Binance, the world’s largest cryptocurrency exchange, offers up to 125x leverage. Changpeng Zhao, the Sino-Canadian founder of Binance and a developer who traces his professional roots back to Wall Street, has said that the extreme leverage numbers were just a “marketing gimmick” and that most traders don’t use them.
Timothy Massad, the former chairman of the Commodity Futures Trading Commission, which regulates derivatives in the U.S., said he welcomed FTX’s decision and hoped other platforms like Binance would follow suit.
The change, he said, could be motivated in part by FTX’s success last week in raising $ 900 million in venture capital, the highest ever value for a cryptocurrency exchange. FTX’s high leverage offerings are more likely to damage its reputation as Mr Bankman-Fried seeks to expand the global reach of its platform, Mr Massad said.
“Sam has bigger visions, and this step removes a focus that might be in the way,” said Massad. “Take it off the table.”
