What is leverage trading?
Leveraged trading is borrowing of funds so that you can take a larger position than you could with your own funds. This type of trading was created to increase potential profit. For example, with a leverage of 100x and an investment of $ 1,000, you are actually trading with $ 100,000 and your potential profit can be much higher. Some exchanges even offer leverage up to 125x.
On the other hand, such trading also carries significant risks. All you need is a slight market fluctuation and you can lose everything in a minute. In our example, with leverage 100x, it is enough for the price of a given asset to fall by 1% and the trader loses his entire deposit through so-called liquidation. Experienced traders therefore advise newcomers to avoid leverage completely.
The leverage is reduced by the Binance exchange as well as the FTX
Both well-known crypto exchanges announced in a relatively short period of time that they will continue to provide this type of trading to their users, but the maximum leverage will be significantly lower. Binance co-founder and CEO Changpeng Zhao said in a tweet on Sunday that they had begun limiting new users to a maximum leverage of 20x as of July 19. This change will gradually be reflected in existing user accounts as well.
The move came just 2 months after the announcement of support for BTC / USDT contracts with up to 125x leverage. Over the past two months, Binance has faced regulatory pressure in several jurisdictions, including the United States, Canada, the United Kingdom, the Cayman Islands, Italy, Poland, Japan, Hong Kong, Thailand and Singapore.Changpeng Zhao, Binance Co-Founder and CEO
A similar policy was applied by the Hong Kong cryptocurrency exchange FTX, which reduced the maximum leverage from the previous 101x to 20x. Sam Bankman-Fried, founder and CEO of FTX, stated that high leverage trading accounted for only a small amount of the exchange's trading volumes. He also said that this was the direction that the whole industry has been heading for a long time. In his view, margin systems must be liquidated as a backup, but to do so infrequently. The average leverage used on the FTX is only 2x.
Steps of these big exchanges are probably not just preventive
Some experts argue that in some cases the leverage is not a healthy part of the crypto industry. These risky trades are considered to be one of the drivers of the May market downturn. In addition, the timing of the changes on FTX and Binance suggests that they did not occur by chance and are likely to be part of ongoing regulatory battle. The theory is also supported by the recent change on the decentralized exchange Uniswap, which has delisted several stock tokens on its platform. The Binance Exchange also announced that stock tokens will no longer be part of their offer. Thus, individual companies seem to be preparing in advance for the arrival of tougher regulatory rules.
Cryptocurrency exchanges such as Coinbase, Kraken and Gemini have chosen a different strategy and avoid any conflict with regulators around the world. According to their leaders, this is a much better practice in the long run, which will also give them a significant competitive advantage in the future. That is why Coinbase is listed on the well-known stock exchange Nasdaq, and Kraken exchange, which has obtained a regulated bank charter in Wyoming, is also preparing for this step.