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Changpeng Zhao stated that the crypto platform was already limiting leverage for its new users to 20 times.
In reaction to an article by the New York Times, two leading crypto exchanges, FTX and Binance, have announced that they would be cutting the amount of maximum leverage their users can use to trade futures contracts. Both exchanges, whose leverages were over 100, announced that they would be reducing it to 20 times.
Per the CEO of FTX Sam Bankman-Fried, his crypto exchange would be the first in the industry to make this crucial move of protecting users from the volatile space of the industry.
Bankman-Fried tweeted that the decision was “a step in the direction the industry is headed and has been headed for a while.” He continued 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.”
Changpeng Zhao of Binance also seized the opportunity to state that the crypto platform was already limiting leverage for its new users to 20 times. He further hinted that this new policy could be extended to the existing users of the exchange too in the future.
The New York Times article the firms were reacting to had posited that the leverage positions these exchanges granted their users had played a role in the collapse of the crypto market in May. According to the article, regulators might start moving against such industry practices in the near future.
FTX’s Bankman-Fried asserted that cutting down the leverage option of its users might lead to an outcry and “bad press” for his firm but he admitted that it is the “right thing to do” especially because he promotes “responsible trading.”
Already, Binance is facing loads of regulatory scrutiny in certain countries like Britain, Thailand, Cayman Island etc for its high-leverage derivatives offerings and its tokenized stock offerings – the exchange has, however, announced that it will stop offering crypto stock options to its users.
What Are Bitcoin Derivatives?
Bitcoin derivatives are an option available on some crypto exchanges that allow users to bet on the future price of the leading digital asset. In this case, the traders do not trade the underlying asset directly, instead, they predict where its price is headed.
While traders are restricted from this trade option in certain jurisdictions, especially due to its volatility, many find a way to circumvent this restriction through other means.
Clara Medalie, the research lead at Kaiko – a crypto analytic firm – called the liquidations trading via this option caused as a “vicious cycle” while also stating that these “liquidations are obviously a huge factor in the price crash.”
The crypto industry had one of its worst months in May this year where the price of BTC fell from as high as over $60,000 to around $30,000 due to China’s hostilities and Tesla’s decision to stop accepting the flagship asset.