FTX, Cryptocurrency Leader, Moves to Curb High Risk Trades

That is what happened in May. Once prices of cryptocurrency began dropping based on market-moving events, like China’s announcement of a regulatory crackdown or the decision by Tesla to halt Bitcoin payments, it automatically prompted the exchanges to liquidate the accounts of the most highly leveraged investors before their collateral became insufficient to cover their positions.

“These liquidations are obviously a huge factor in the price crash,” Clara Medalie, the research lead at Kaiko, a cryptocurrency market data provider in Paris, said, recalling the sudden decline in cryptocurrency value in mid-May. “It is a vicious cycle.”

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

Still, he had predicted in an interview last week that some investors might not welcome any move to cut leverage. “We would get consumer outcry if we got rid of it, and we’d get very bad press,” he said. “But it might be the right thing to do.”

Mr. Bankman-Fried also acknowledged that high leverage created a perception that exchanges like his encouraged risky trading, even though he asserted this was not a fair conclusion.

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

Timothy Massad, the former chairman of the Commodity Futures Trading Commission, which regulates derivatives in the United States, said that he embraced FTX’s decision and that he hoped other platforms like Binance would follow.

Article source: https://www.nytimes.com/2021/07/25/us/politics/cryptocurrency-ftx-high-risk-trade.html