Binance, FTX slash crypto leverage after NYT report on margin trading

Crypto exchanges Binance and FTX slashed leverage available to users just hours after a New York Times (NYT) article detailed the role of high-risk trades in May’s dramatic crypto crash.

Crypto exchanges Binance and FTX slashed their leverage just hours after a New York Times (NYT) article detailed the role of high-risk margin trades in May’s dramatic crypto crash.

The two leading platforms announced Sunday they’d both reduce maximum leverage to 20x, down from 125x and 101x respectively.

Binance chief exec Changpeng Zhao later tweeted to say he’d lowered leverage offered to new futures sign-ups one week earlier.

Binance will now widen those restrictions to existing accounts less than a month old.

Leverage (also known as margin) is debt used by traders to boost buying power and (potential) returns.
According to NYT, traders borrowed big for bets on Bitcoin’s future price in the lead-up to May.
Exchanges liquidated margined accounts when BTC suddenly halved, adding further downward pressure.

FTX founder and chief exec Sam Bankman-Fried also made his company’s announcement via Twitter on Sunday, noting there’s “been a bunch of discussion recently around high leverage.”

The 29-year-old Hong Kong resident said, “while we think that many of the arguments miss the mark, we also don’t think it’s [leverage] an important part of the crypto ecosystem, and in some cases it’s not a healthy part of it.”

Citing data from TradingView and Coin Metrics, NYT claimed the $1.3 trillion lost from crypto markets since their May peak was accelerated by the types of leveraged trades offered by FTX and Binance.

Cut crypto leverage to appease the Feds

Binance and FTX both alluded that altruism led to their leverage reductions, but their hands were likely influenced a tad more than they’re letting on.

Crypto exchanges worldwide have faced increased regulatory scrutiny as governments look to get a handle on the ecosystem — specifically investment products offered by companies native to the space.

3) Any margin system needs to have liquidations as a backup, but the goal is to do so rarely.

At FTX, way less than a percent of volume comes from margin calls. This contrasts with a few platforms which are sometimes > 5%, and some which removed data because it looked bad.
— SBF (@SBF_FTX) July 25, 2021

Bankman-Fried downplayed how much FTX volume is tied to margin traders.

In particular, Binance has had it rough. Countries like the UK, Cayman Islands, Malta, and Japan (among others) have effectively ex-communicated the exchange from their respective jurisdictions in recent weeks.