Foremost crypto exchange companies FTX and Binance have begun moves to reduce the maximum leverage users can use to trade futures contracts on their platforms. Both exchanges, hitherto, gave their users access to leverages that were over 100.
The high leverage positions, whilst it allows investors to earn big, also opened them up to huge losses. This, according to a report from New York Times played a critical role in the price crash witnessed in the crypto industry in May.
According to FTX’s CEO, Sam Bankman-Fried, only a small number of traders use the high leverage position, however, the exchange was still going to cut the limit of these positions to just 20 times in order to “encourage responsible trading.”
This position was also rehashed by CZ of Binance. The embattled exchange top executive cited a growing need for “consumer protection” as why the platform is taking this step. Per his statement, Binance would first limit leverage for its new users to 20 times and over time, existing users would also face this limit.
.@binance futures started limiting new users to max 20x leverage last Monday, Jul 19th, 7 days ago. (We didn't want to make this a thingy).
In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks.
Stay #SAFU. 🙏
— CZ 🔶 Binance (@cz_binance) July 26, 2021
The New York Times report had highlighted how traders, using the crypto derivatives option, had bet big on the continued ascendancy of the leading digital asset. However, the actions of China and Tesla hurt the space which led to multiple losses for traders.
A Bitcoin futures is a trade option that allows traders to predict the price of the crypto king. These traders do not necessarily have to buy or sell the asset, instead, they just have to guess where the market is headed. This tends to leave them very vulnerable especially when their prediction is wrong and they do not have enough collateral in their accounts to back up their bets.