When the supervision is getting tougher and the high leverage exit is in progress

In the absence of vicious competition from regulation, crypto derivatives exchanges have increased their leverage from 20 times to 100 times, 125 times, or even 150 times. Although they have made huge profits from them, they have a significant impact on the health of the crypto market and investors’ Financial security is not a good thing. Recently, the aforementioned situation has ushered in a turning point.

High leverage seems to be ebbing in the crypto market.

On July 25, SBF, the founder of FTX, announced on Twitter that FTX would cancel high-leverage products and limit the leverage to 20 times. The next day, Binance founder Zhao Changpeng also tweeted that Binance Futures Contract has adjusted the leverage that new users can use to a maximum of 20 times, and this upper limit will also be applied to all users in the next few weeks.

SBF said on Twitter that clearing transactions only account for less than one percent of the trading volume on FTX, and that clearing on FTX is not the main factor causing volatility, but he agrees that high leverage (>20 times) is not healthy and is not encrypted As an important part of the ecosystem, everything has a limit.”

The industry generally believes that the movements of the two major cryptocurrency exchanges may be in response to the increasingly severe regulatory situation.

At present, leading derivatives exchanges such as Binance, FTX, and Huobi have all made measures to lower their leverage ratios, which may lead to the loss of some users. But for the encryption market, these measures have released positive signals of more responsibility and compliance, which are conducive to the healthy and orderly development of the encryption market.

How is leverage “raised”?

For a long time, cryptocurrency exchanges have been in a regulatory gray position, and the market has a strong tendency to speculate. This has also made many cryptocurrency exchanges take futures contract trading as a key product, and continue to attract users and expand trading volume with high leverage under vicious competition. It has climbed from 20 times in the early days to 150 times as high as it is today.

In May 2016, the derivatives exchange BitMEX announced the launch of Bitcoin’s 100 times leveraged perpetual contract. This is the first time in the crypto sector that the leverage of futures contracts has been raised to a hundred times. BitMEX has been the exchange with the highest trading volume of crypto derivatives for many years.

“Some people offer similar types of products, focusing on depraved gamblers, that is, retail traders of Bitcoin.” BitMEX founder Arthur Hayes said, “Then why don’t we do this?”

In December 2018, OKEx announced the launch of BTC perpetual contract products and supports up to 100 times leverage. As its contract products obtain a large amount of traffic and profits, FTX, Binance and Huobi have entered the market one after another.

In April 2019, the FTX exchange was officially launched. At the same time, the highest leverage ratio was symbolically increased to 101 times, making it the highest leveraged exchange in the industry at that time. Since then, BTC, ETH, HT and other currencies that have been launched support this multiple.

In October 2019, the Binance Contracts platform announced that the BTC futures contract supports a leverage multiple of up to 125 times, and the industry’s leverage multiple has been launched to further increase.

In response to questions from the outside world at the time, Binance CEO Changpeng Zhao responded on Twitter: “Not every function is designed for the public. Although some functions will not be liked by everyone, there is a high demand for specific groups. Please don’t use it if you don’t like it or don’t need it. As a platform, we must remain competitive by offering options.”

Huobi and OKEx followed closely behind. In March 2020, Huobi announced the launch of perpetual contract products and supports up to 125 times leverage. In September 2020, OKEx announced that the full range of contract products supports BTC with a leverage of up to 125x and other currencies up to 75x.

In addition, some second- and third-tier exchanges even pushed their leverage to 150 times. In June 2020, Blade, a derivatives exchange invested by Coinbase, announced that the leverage of its contract products can reach 150 times. In February of this year, BitWell also announced the launch of a perpetual contract product with a maximum leverage of 150 times.

When the supervision is getting tougher and the high leverage exit is in progress

As the leverage ratio of the crypto market becomes higher and higher, the serial liquidation of long or short contracts when the market fluctuates is prone to trigger a larger-scale decline in the market, which leads to the continuous enlargement of the volatility of the crypto market. In the 312 market in 2020 and the 519 market this year, excessive market leverage is considered to be one of the main reasons for the sharp decline in the market.

“On March 12, when the price of Bitcoin plummeted from $7,900 to $3,600 (a drop of more than 50%), a long contract worth $1 billion was liquidated on BitMEX alone.” Crypto analyst Joseph Young was reviewing the 312 market. Said, “The real problem occurred when the price of Bitcoin fell below $5,000. This time the price plummet was so dramatic that BitMEX’s entrusted ledger was almost emptied.”

Ari Paul, managing partner of BlockTower Capital, also said that when the price of Bitcoin fell below $4,800, investors did not choose to sell. Selling pressure mainly came from BitMEX and large-value liquidation, which later turned into sell orders.

As a result, excessive leverage is considered to be one of the biggest systemic risks in the crypto market. The resulting criticisms of market manipulation, excessive volatility, and inadequate protection of investment interests are also lingering, which has affected it to a certain extent. Cryptocurrency is further accepted by the traditional financial market.

“I’m not saying that this will lead to the next financial crisis.” Timothy Massad, the former chairman of the U.S. Commodity Futures Trading Commission, which oversees derivatives trading, told the New York Times. The butterfly that caused a tornado in Sri Lanka?”

Double pressure from public opinion and supervision

In the past few years, the victims of high leverage in derivatives trading are not uncommon.

On June 5, 2019, Hui Yi, the founder of the crypto market analysis agency BitEasy, hanged himself. A few days before his death, he revealed in the WeChat group that he had opened an empty order with 100 times leverage with 10 BTC. Prior to this, it was also shorted with a leverage of 20 times and 600 BTC. After that, the market went up, and it was rumored that he chose to give up because of the unbearable leverage of 100 times and the liquidation of his position. Although there are different opinions on the cause of death, according to his friends before his death, the huge losses caused by leveraged liquidation may at least be “the last straw to overwhelm the camel.”

In recent years, there have been news that retail investors have suffered huge losses due to leveraged liquidation, such as “husband and wife speculating in Bitcoin, losing 20 million, killing their daughter and committing suicide with their corpse in the sea” and “Huobi Building in Hainan” All social news.

In this year’s 519 market, the accumulated liquidation amount of major exchanges exceeded 40 billion yuan. Due to the great harm of high leverage to investors, the financial regulatory authorities of many countries have taken a high-pressure attack on encrypted derivatives. However, limited to the characteristics of cryptocurrency exchanges that are difficult to supervise, various highly leveraged derivatives have been operating in the gray area of ​​various countries.

As the crypto market has risen this year and more and more new users have entered the market, regulators in various countries have further strengthened their regulatory attitudes and mechanisms for the crypto market, and criticism from the main public opinion circles has gradually gained momentum.

First, on May 19, the Financial Stability and Development Committee of the State Council issued a message requesting that Bitcoin mining and trading be severely cracked down to “resolutely prevent the transmission of individual risks to the social field.” Since then, many media have published commentary articles and investigation reports.

On May 24, the Xinhua News Agency’s subsidiary Economic Information News reported an article titled “It’s Urgent to Rectify the Hype in Virtual Currency”, which mentioned that “Many investors want to get rich overnight, and the trading leverage is usually enlarged to 5 times or even higher. In the case of large price fluctuations, investors have huge trading risks.”

On May 29, Xinhua News Agency published an article titled “One Hundred Times Leverage, Crazy “Currency Circle” Brings “Rapid Wealth” or “Blood Position””, which mentioned a case of liquidation by multiple investors after leveraged trading , And pointed out that the liquidation under high leverage has left many investors empty-handed, but the virtual currency trading platform has made steady profits.

Affected by the aforementioned events, many domestic crypto derivatives trading platforms have begun to strictly restrict the use of leveraged products and the highest leverage ratio.

On May 25, Huobi announced that in order to protect the interests of investors, it would suspend the opening of services such as futures contracts, leverage, and exchange-traded products (ETP) for new users in mainland China. At the same time, the maximum leverage ratio of a large number of existing users has also been lowered to 5 times.

On the same day, the first-line derivatives exchange Bybit announced that it would restrict mainland IP users from accessing the API interface. In addition, crypto derivatives exchanges XMEX, BBX, etc. have successively announced the suspension of operations.

In June, regulatory agencies in nearly 10 countries, including Japan, the United Kingdom, Italy, and Thailand, issued warnings against Binance’s unauthorized provision of derivatives trading services. Against this background, the leading derivatives exchange Binance and FTX decided to lower their leverage ratio and made certain compromises to the regulators and the outside world.

Although the regulation of the crypto market in various countries around the world has entered a deep water zone, due to the difficult nature of the crypto market to be regulated, these regulatory warnings and crackdowns may only have practical effects on FTX and Binance exchanges that are committed to compliance, and more The exchanges are still outside of supervision and have little effect. For example, exchanges such as OKEx, Bybit, and MXEC still support contract leverage of up to 100 times or even 125 times.

Leveraged contracts are an important part of any mature financial market, but excessively high leverage is not. How to deal with the relationship between user needs, platform benefits, and social responsibility will be a long-term proposition that crypto derivatives trading platforms need to face.

Author | Richard Lee


Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/when-the-supervision-is-getting-tougher-and-the-high-leverage-exit-is-in-progress/
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