Cryptocurrency leader FTX set to curb high-risk transactions

A popular cryptocurrency exchange announced on Sunday that it was restraining a type of high-risk trading that has been partly blamed fo...

A popular cryptocurrency exchange announced on Sunday that it was restraining a type of high-risk trading that has been partly blamed for the sharp swings in the value of Bitcoin and the casino atmosphere on such platforms around the world.

The exchange’s decision, FTX, would reduce the size of the bets investors can make by reducing the amount of leverage it offers to 20 times instead of 101. Leverage increases the chances of traders not only to make profits, but also losses.

“We’re going to be the ones to take the first step here,” Sam Bankman-Fried, 29, the billionaire founder of the platform, which operates from Hong Kong, said on Twitter on Sunday. “Today we are removing the high leverage from FTX. The largest permit will be 20x.

The announcement came after The New York Times, in an article published online Friday, detailed the risky trades offered on FTX and other global exchanges like Binance and BitMEX which accelerated a global crash in May. That month, more than $ 20 billion of those bets were cleared on cryptocurrency exchanges around the world.

Mr Bankman-Fried said the reduction in leverage amounted to “a step in the direction the industry is taking, and has been for some time,” adding that “although we believe there are many arguments high leverage are missing the mark, we also don’t think this is an important part of the crypto ecosystem, and in some cases it is not a healthy part.

Global platforms like FTX allow traders to borrow big when betting on price movements – traders don’t buy and sell cryptocurrencies, but rather predict where the prices of the underlying assets will go. These bets, known as derivatives, mean that if investors invest $ 1,000, the exchange grants them credit to allow them to bet on the future price of cryptocurrency with a value of up to $ 101,000. on FTX. Now, with the new cap, the maximum for this trade would be $ 20,000.

This type of transaction is not meant to be accessible to non-professional investors in the United States, but – at least historically – some of these investors have used workarounds to trade on the sites.

The leverage effect makes investors much more vulnerable to the liquidation of their accounts following an automated margin call if the price of the cryptocurrency moves against their expectations and they have failed. not enough collateral on their accounts to back up their bets.

This is what happened in May. Once the cryptocurrency prices started to fall based on evolving market events, such as China’s announcement of a regulatory crackdown or Tesla’s decision to stop Bitcoin payments, this resulted in automatically prompted the stock exchanges to liquidate the accounts of the most indebted investors before their guarantees became insufficient. to cover their positions.

“These sell-offs are obviously a huge factor in falling prices,” said Clara Medalie, head of research at Kaiko, a data provider on the cryptocurrency market in Paris, recalling the sudden drop in the value of crypto. -coins in mid-May. “It’s a vicious circle.”

Mr Bankman-Fried said on Sunday that only a small percentage of traders enjoy the maximum leverage available. He also argued that FTX had fewer liquidations than other exchanges and had long tried “to encourage responsible trading”.

Still, he predicted in an interview last week that some investors might not like any move to reduce leverage. “We would get an outcry from consumers if we got rid of it, and we would get really bad press,” he said. “But it might be the right thing to do.”

Mr Bankman-Fried also acknowledged that high leverage made it look like exchanges like his encouraged risky trades, although he said that was not a fair conclusion.

Binance, the world’s largest cryptocurrency exchange, offers leverage up to 125 times. Changpeng Zhao, the Sino-Canadian founder of Binance and a developer tracing his professional roots to Wall Street, said the extreme leverage numbers were just a “marketing gimmick” and most traders don’t. not use.

Timothy Massad, the former chairman of the Commodity Futures Trading Commission, which regulates derivatives in the United States, said he endorses FTX’s move and hopes other platforms like Binance will follow suit.

The change, he said, could be driven in part by FTX’s success this last week to raise $ 900 million in venture capital, the most ever for a cryptocurrency exchange. High leverage offers on FTX are more of a reputation liability as Bankman-Fried seeks to expand the global reach of his platform, Massad said.

“Sam has bigger visions and this move eliminates a flash point that could get in the way,” Mr. Massad said. “Take it off the table.” “

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Newsrust - US Top News: Cryptocurrency leader FTX set to curb high-risk transactions
Cryptocurrency leader FTX set to curb high-risk transactions
Newsrust - US Top News
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