Binance and FTX decide to limit leverage for cryptocurrency trading

Charlie Taylor

Cryptocurrency brokers Binance and FTX announced over the weekend that they will limit leveraged trading to bring more security to retail investors. FTX CEO Sam Bankman-Fried broke the news through a tweet series published on Sunday morning (25). In posts, he stated that the highest leverage the exchange will allow will be 20 times. “An effective margin system is an integral part of an efficient economic system. However, there are limits to everything. The change will affect a small fraction of activity on the platform, and while many users like the option, few use it. It's time to move on,” he wrote.

According to Bankman-Fried, the settlement of mega leveraged positions represents only 1% of FTX's volume, with the most used by users being around 2x.

Binance limits leverage to 20x

Later that day, Binance CEO Changpeng “CZ” Zhao, announced that the exchange had adopted the measure a week earlier: "Binance futures began capping new users to a maximum leverage of 20x last Monday, July 19."

According to CZ, the limit will be progressively extended in the coming weeks for existing users of the platform. Binance currently offers leverages that reach 125 times. In this type of trading, a trader increases his exposure without actually having the amount needed for that investment by borrowing money from the broker. Example: if a user has $100, but uses 20 times leverage, he can invest $2,000 in that position. The amount is used to bet on the rise or fall of a cryptoactive in the hope of multiplying the profit. At the same time, leverage can also intensify the loss. For that reason, it is a high-risk operation. When the currency goes against the direction predicted by traders, exchanges force a liquidation of long positions to protect the investor. In his publication, the creator of the FTX said that clearance sales are important for safety, "but the goal is to rarely do this." What is seen in the market, however, are increasingly larger settlements being triggered with each change in the price of cryptocurrencies. The 12% increase in bitcoin on Sunday (25), for example, triggered a liquidation of more than $1 billion in leveraged positions in the market.

A brake on leverage

The founders of the two leading market platforms admitted to The New York Times on Friday (23) that leverage leads to increased volatility in the crypto market. Asked whether the industry should rethink the model currently offered to retail investors, Sam Bankman-Fried said he feels conflicted. “I think there would be a lot of gains from reducing the leverage of the system and avoiding some of the flaws we've seen. But I also think that there would be a lot of losses in doing that and it would avoid a lot of economic efficiency by getting rid of it,” he explained. Despite this, he said there is a general consensus that brokers should get rid of leverages in excess of 100x. CZ, on the other hand, made a firmer defense of the leverage system, saying professional traders know how to manage risk. “The word risk means different things to people. Some of them say it's a risk, but others say it's an opportunity”, he concluded.

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