The CEOs of two major crypto exchanges have announced they will be lowering their maximum leverage limit for futures trades. These moves were made amid an impending regulatory storm.
Both FTX and Binance have lowered their maximum leverage limits for futures trading to 20 times leverage. The announcements follow the duly expected release of a new regulatory framework to be implemented by the US Securities and Exchange Commission (SEC) by July 28.
Binance previously had a maximum leverage and margin on Bitcoin (BTC) against Tether (USDT) contracts to 125 times leverage. At that level, a 100 USDT collateral deposit on Binance Futures will allow users to hold 12,500 USDT in BTC.
Binance’s new rule states that new users with registered futures accounts of less than 30 days will not be allowed to open positions with leverage exceeding 20 times. However, leverage limits for new users will gradually increase after one month from registration.
The harsh reality of leveraged trading is that the majority of people who trade in those markets lose out, especially in volatile markets like cryptocurrencies. So not only do you lose your initial investment, but also any additional collateral you may have posted to keep the position open. For many who are new to the crypto market, leveraged trades could put a big hole in the bank.
Binance also recently stopped support for its stock tokens following a slap on the wrist from the Hong Kong SEC. Exchanges are likely worried about the regulatory screws tightening. Huobi has since also suspended the service to Chinese users.
Is Leverage to Blame for Market Volatility?
A July 23 New York Times article also criticised high-leverage trading in crypto as risky. The article implied impending regulatory moves against high-leverage margin trading, citing Timothy Massad, a former US SEC chairman.
Binance CEO Changpeng Zhao acknowledged that “volatility is amplified by the leverage”, according to the NYT article. But FTX CEO Sam Bankman counters by saying: “Nearly every crypto derivatives exchange allows it, and nearly every one will say the same thing: It’s a tiny fraction of volume and positions […] It’s also not what chiefly contributes to volatility.”
This is business as usual for crypto – a market that is known to be highly volatile and exposed to high levels of product leverage on these exchanges. [It’s] a perfect recipe for liquidations that can cut both ways depending on sharp spot movements to the up or downside.
Ryan Todd, research analyst, The Block
Binance De-Risking Operations Ahead of Regulatory Clampdown?
Binance has implemented various changes and has stayed abreast with regulatory requirements as they come up. With regulation becoming clearer, exchanges are trying to not get caught off guard while providing infrastructure for their clients.
Binance Australia is assisting its customers in one such way by partnering with Australian startup Koinly to assist its Aussie customers with crypto tax reporting.
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