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After the strong opposition from regulators and consumers to high-risk derivatives, Binance will significantly reduce the risk that customers can take in its flagship cryptocurrency products, because high-risk derivatives may soon cause painful losses to users .
The cryptocurrency exchange, which facilitates hundreds of billions of dollars in transactions every month, said it will reduce the maximum leverage of its futures contracts (the amount investors can borrow to amplify their bets) from the previous peak of 125 times to 20 times . Changpeng Zhao, the cryptocurrency tycoon who runs Binance, said the cuts are “conducive to protecting consumers” and will be implemented “in the coming weeks”.
After competitor FTX took similar measures over the weekend, Binance announced its decision on Monday.Trader about two months later Estimated loss of 8.6 billion U.S. dollars Through the liquidation during the cryptocurrency flash crash on May 19th.
Stephen Kelso, head of marketing at the brokerage firm ITI Capital, said: “Many of these unregulated crypto platforms have been providing retail investors with so many ropes to hang themselves, which is completely wrong. He is totally wrong. Said that reducing leverage is “an inevitable response to the widespread anger of taking advantage of retail customers.”
Binance’s futures contracts are one of the most actively traded products in the world Trillion dollar market For crypto derivatives. The platform, like several of its competitors, allows traders to obtain huge profits based on a small amount of cash. But consumer capital may be wiped out due to slight shocks in the highly volatile crypto market.
‘Very big bet’
The British financial regulators banned the sale of crypto derivatives to retail traders because of concerns about the risks. Regulators around the world are trying to crack down on the unauthorized sale of these products on crypto platforms. However, offshore exchanges like Binance, which is incorporated in the Cayman Islands, continue to provide these derivatives, even to residents of prohibited jurisdictions.
Binance is the leader in crypto derivatives called Perpetual Futures, which tracks the price of digital currencies, from Bitcoin and Ethereum to more esoteric tokens (such as Dogecoin). The potential rewards and risks are amplified by the very high leverage that users can assume.
Anatomy of Perpetual Crypto Futures
Perpetual encrypted futures are different from the futures usually offered in traditional markets, such as futures that track oil, wheat, or stock indexes, because they can be held indefinitely.
The expiry date of traditional futures helps to link the futures contract to the price of the underlying asset, because the holder usually delivers the asset on that date.
For perpetual futures, the “fund rate” mechanism links the futures price with the spot price. When there is a disagreement between the two, one party to the transaction must pay the other party within the set window every eight hours. These payments are based on the nominal size of the trader’s position-which means they can be substantial for highly leveraged bets.
On Monday, Binance customers can still trade Bitcoin futures with leverage up to 125 times the amount they have placed. For example, a user can place the equivalent of US$2,500 on the gaming table for a bet of US$250,000-100 times leverage.
This is far beyond what customers can do in many traditional markets. In the UK, retail traders’ CFD leverage must not exceed 30 times-this is a high-risk bet on the foreign exchange market.
When the betting loss exceeds the investor’s dedicated deposit, Binance will automatically liquidate the customer’s transaction. In highly leveraged transactions, this means that even small fluctuations in the price of Bitcoin will exhaust the client’s funds.
Carol Alexander, a professor of digital asset markets at the University of Sussex, said: “Unless they are experts in financial markets and crypto, people simply cannot understand these complex mechanisms, and there are not many people around them.” “The margin is very small [for error] But they are making a big bet.”
“The most painful experience I have ever experienced”
Susanna K, a marketing executive from Sydney, Australia, got into this situation when the crypto market crashed during a two-hour volatility on May 19th.
During the 2020 Covid-19 blockade, Susanna started trading in the soaring crypto market with the help of friends and YouTube video information. “It’s not like I’m a novice or anything,” she said. After earning at least $150,000 in trading tokens on the exchange in early 2021, she started trading derivatives on Binance a few weeks ago.
As prices began to plummet and Susanna had hundreds of thousands of dollars on standby in her bank account, she began to transfer these funds to Binance to prevent her position from being liquidated. But she said that she could not transfer cash fast enough and also encountered difficulties in using the Binance system that encountered technical problems on the day.
By the end of the day, she had lost more than $250,000. “I am in a panic,” she said. “This is the most painful experience in my life.”
Case Study: “Automated Clearing” Spiral
Automatic clearing is one of the main features of leveraged crypto trading. The higher the level of borrowing, the greater the risk of a trader’s initial capital being wiped out.
When a user enters a transaction, Binance will determine a “clearing price” that takes into account factors such as initial leverage, funds to support futures transactions, and starting price.
The Financial Times used Binance pricing data and exchange mathematical formulas to construct this case study. The transaction entered on February 2, 2021, when Bitcoin was trading at $33,468.
This $2,500 transaction was entered with 100 times leverage, making its “nominal” size of $250,000. Binance’s liquidation bet will need to be reduced to $32,293. As the price of Bitcoin soared, the transaction performed well initially, regardless of fees and financing costs, with a maximum profit of more than $180,000.
But the flash crash on May 19—the price of Bitcoin plummeted from about $38,000 to about $30,000 in less than two hours—soon traders made the choice to either close the transaction, possibly lose money, or invest Extra funds to keep it away.
In order to avoid being liquidated, users will have to pay an additional approximately $30,000. If they cannot do it, they risk losing everything.
Binance also allows users to use a more complex feature called “cross-asset” margin, in which the clearing price is also affected by the unrealized gains and losses of other transactions in addition to the amount deposited in the user’s futures account. This means that when the market is falling at the same time, it may cause a domino effect, and each failed bet will increase the chance that other transactions will also deteriorate.
These types of spirals, where traders inject ever-increasing capital in an attempt to protect their initial spending, are one of the factors that make leveraged crypto betting so risky.
Many traders who have suffered losses like Susanna have turned to social media platforms such as Reddit and Discord, which has helped build the popularity of crypto trading in exchange for their unfortunate stories. Hundreds of Binance customers from all over the world have formed an online group to seek compensation in exchange.
Many companies have had limited success so far, and Binance stated that it will only accept claims “when users suffer actual losses due to system problems or errors rather than market fluctuations.”
The company said that some users who claimed to have made losses “before making a profit during a bull market.” It said that this is “usually a sign that users have begun to assume that they will always be in a state of continuous winning, ignoring the risks inherent in all trading activities.”
Data visualization by Alan Smith.