The moves would reduce the size of the bets that investors can make by drastically cutting the maximum leverage offered.,
Leaders in Cryptocurrency Industry Move to Curb the Highest-Risk Trades
The moves would reduce the size of the bets that investors can make by drastically cutting the maximum leverage offered.
Many users on these exchanges are betting on future price fluctuations of cryptocurrencies like Bitcoin rather than buying and selling the currencies, and they are borrowing to make those bets even bigger.Credit…Toya Sarno Jordan/Reuters
Two of the world’s most popular cryptocurrency exchanges announced on Sunday that they would curb a type of high-risk trading that has been blamed in part for sharp fluctuations in the value of Bitcoin and the casino-like atmosphere on such platforms globally.
The first move came from the exchange, FTX, which said it would reduce the size of the bets investors can make by lowering the amount of leverage it offers to 20 times from 101 times. Leverage multiplies the traders’ chance for not only profit, but also loss.
“We’re going to be the ones to take the first step here,” Sam Bankman-Fried, 29, the billionaire founder of the platform, which operates from Hong Kong, said on Twitter on Sunday. “Today, we’re removing high leverage from FTX. The greatest allowable will be 20x.”
About 14 hours later, Changpeng Zhao the founder of Binance, the world’s largest cryptocurrency exchange, echoed the move by FTX, announcing that his company had already started to limit leverage to 20 times for new users and it would soon expand this limit to other existing clients.
It had previously offered a maximum of 125 times, meaning that an investment of $1,000 could be turned instantly into a bet of as much as $125,000 on Binance. Now, with the new cap, the maximum in that transaction would be $20,000.
“In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks,” Mr. Zhao wrote on Twitter.
The announcements came after The New York Times, in an article published online Friday, detailed the risky trades offered on FTX and other global exchanges like Binance and BitMEX that accelerated a global crash in May. That month, more than $20 billion worth of those bets were liquidated on cryptocurrency exchanges worldwide.
Mr. Zhao and Mr. Bankman-Fried were both asked about the high-leverage offerings — and the risks they create — on several occasions over the past two months by The Times.
Mr. Bankman-Fried said on Sunday that lowering the leverage amounted to “a step in the direction the industry is headed, and has been headed for a while,” adding that “while we think that many of the arguments are high leverage miss the mark, we also don’t think 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 and Binance allow traders to borrow big when betting on price fluctuations. Traders do not buy and sell cryptocurrencies but instead predict where prices in the underlying assets will head.
Those bets, known as derivatives, allow investors to make a bet on the future price of a cryptocurrency rather than buying and selling the actual underlying cryptocurrency. They bet on Bitcoin price moves without actually purchasing it.
This type of transaction is not supposed to be available to nonprofessional investors in the United States, but in the past some amateur investors have found workarounds to trade on the sites.
Sam Bankman-Fried, 29, the billionaire founder of the cryptocurrency exchange FTX.Credit…Lam Yik Fei for The New York Times
Leverage leaves investors much more vulnerable to having their accounts liquidated as a result of an automated margin call if the price of cryptocurrency moves against their prediction, and they do not have enough collateral in their accounts to back up their bets.
That is what happened in May. Once prices of cryptocurrency began dropping based on market-moving events, like China’s announcement of a regulatory crackdown or the decision by Tesla to halt Bitcoin payments, it automatically prompted the exchanges to liquidate the accounts of the most highly leveraged investors before their collateral became insufficient to cover their positions.
“These liquidations are obviously a huge factor in the price crash,” Clara Medalie, the research lead at Kaiko, a cryptocurrency market data provider in Paris, said, recalling the sudden decline in cryptocurrency value in mid-May. “It is a vicious cycle.”
Mr. Bankman-Fried said on Sunday that only a small percentage of traders take advantage of the maximum available leverage. He also argued that FTX had fewer liquidations than other exchanges and he had long tried to “encourage responsible trading.”
Still, he had predicted in an interview last week that some investors might not welcome any move to cut leverage. “We would get consumer outcry if we got rid of it, and we’d get very bad press,” he said. “But it might be the right thing to do.”
Mr. Bankman-Fried also acknowledged that high leverage created a perception that exchanges like his encouraged risky trading, even though he asserted this was not a fair conclusion.
That perception is in part why regulators around the world are eying Binance, the world’s largest cryptocurrency exchange. Just since June, the exchange has faced increased scrutiny from financial regulators in Britain, the Cayman Islands, Hong Kong, Lithuania, Italy, Poland and Thailand, many of them critical of its high-leverage derivatives offerings or a new product line introduced this spring that allows customers to buy cryptocurrency-linked versions of stocks like Tesla and Apple.
Mr. Zhao, the Chinese-Canadian founder of Binance and a developer tracing his professional roots to Wall Street, has said that the extreme leverage figures were just a “marketing gimmick” and that most traders do not use them.
Timothy Massad, the former chairman of the Commodity Futures Trading Commission, which regulates derivatives in the United States, said that he embraced FTX’s decision and that he hoped other platforms would follow. Binance and FTX are two of the world’s largest exchanges, but others including Phemex and BitMEX, were still offering, at least according to their websites, 100 times leverage as of Sunday.
The move by FTX, Mr. Massad said, might be motivated in part by FTX’s success this past week in raising $900 million in venture capital, the most ever for a cryptocurrency exchange. The high-leverage offerings on FTX are more of a reputational liability as Mr. Bankman-Fried looks to expand his platform’s global reach, Mr. Massad said.
“Sam has bigger visions and this move eliminates a flash point that might get in the way,” Mr. Massad said. “Take it off the table.”