Two major exchanges have announced that they are cutting down the margin of leverage that users can take when trading in derivatives markets.
FTX has reduced the maximum leverage available on the platform down to 20 times the cash staked, a significant reduction from its previous limit of 101 times.
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Sam Bankman-Fried, the firm’s influential CEO, indicated that the move was part of the company’s efforts to encourage responsible trading.
Soon after, Binance, the world’s leading exchange announced a reduction in leverage for all users across its popular Futures Trading product.
Since July 19, 2021, new users on the Binance Futures platform were prohibited from opening positions with leverage exceeding 20x.
Previously, investors have been able to leverage up to 125 times their investment.
Crypto derivatives are synthetic investment assets that typically track the price of real assets, say bitcoin, or Ethereum. With futures trading, investors are able to bet on the future price movements of the digital assets.
By offering leverage on trades, traders are able to take large positions, letting them magnify potential gains. A trader can, for example, place the equivalent of $2,500 on the table to take on a $250,000 bet – 100 times leverage.
On the other hand, and at the same time, traders also magnify potential losses. Binance automatically liquidates clients’ trades when losses on the bets exceed investors’ dedicated deposits.
Liquidation refers to the loss of the actual staked amount. It is the point or price where you will lose your entire capital if the market goes against you. The higher the leverage the closer the price to the position you took.
Given the highly volatile crypto sector, it is very easy for fluctuations to occur and cause big losses for investors. On May 19, 2021, traders lost an estimated $8.6 bullion during a crypto flash crash.
As a result, crypto derivatives markets are under increasing scrutiny.
In the latest development, Binance has decided to terminate its margin trading service for The Sterling Pound, Euro, and Australian Dollars. It has also received warnings and denouncements from regulators in the U.K, Japan, Italy, and Thailand.
Authorities are accusing the exchanges of taking advantage of retail traders – non-institutional traders who invest their personal wealth and who are, for the most part, amateurs.
Regulation is essentially one of the key reasons for cutting down on high leverage to remain compliant.
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