Leverage trading is a risky business.
In crypto, it is the practice of making a bet on the future price of bitcoin, and amplifying your potential winnings—or losses—by a set amount. On platforms like BitMEX, traders can leverage their trades up to 100 times the amount they are betting. It’s already widely available on crypto exchanges including Kraken, Coinbase Pro and Huobi. Even more pressing, margin trading will be coming soon to Binance, the largest crypto exchange by volume.
But here’s the issue. While leverage trading is an effective way of clawing out a decent profit in traditional markets where the underlying asset moves by fractions of a percent each day, crypto is a different ball game. Yesterday, the price of ten coins in the top 100 cryptocurrencies by market cap moved by more than 10 percent. One in particular, Zcoin, rose by more than 40 percent. By comparison, the US dollar index moved just 0.25 percent.
Allowing leverage trading on such a volatile asset is a recipe for disaster–the likes of which have lead to the loss of millions and in one case, a trader’s life.
The risks of leverage trading
“I lost everything.”
These were the words of a crypto trader—with the username “NoMoreSadDays”—who built up a large portfolio of digital assets only to lose them after discovering leverage trading on BitMEX. This trader in particular lost one bitcoin-worth ($8,200) of crypto and was considering killing himself. He wrote on Reddit, “If there’s anything that anyone can take away from this, it’s to not mess around with margin trading and leverage unless you really know what you’re doing. It’ll be the death of you. Literally.”
Then on Tuesday, we heard about the case of Hui Yi, the CEO and co founder of data provider BTE.TOP, who reportedly committed suicide on June 5. Crypto news site 8BTC reported that he lost 2,000 ($16.4 million) of his client’s bitcoin by using 100 times leverage trading. Decrypt has not been able to verify the death of the CEO–but we’ve reached out and will update the piece when we do.
These kind of losses are more common than you’d think. Back in August, 2018, a trader was liquidated on OKEx for placing a $416 million bet using cash and leverage trading. This led to a shortfall of 1,200 bitcoin on the platform, worth $9 million at the time, loses that were “socialized” among other traders, meaning they had to foot the bill.
In extreme cases, the volatility of illiquid cryptocurrencies has been a particular problem for margin trading. On May 26, a sudden crash in the price of CLAM tokens caused havoc on Poloniex. When it dropped by nearly 77 percent in 25 seconds, this caused a loss of 1,800 bitcoin ($14.7 million) among lenders on the platform. These losses will have to be repaid by those trading other coins.
While this is an edge case, it mimics the behaviour of more liquid coins, just on a shorter scale. In 2018, many cryptocurrencies lost up to 90 percent of their value. While this happened over a longer period of time, it shows that even the bigger coins are not averse to drastic changes in price.
The point is this: In such an unregulated market, where price manipulation is rampant and anyone from your kid to your aunt can get involved, there is enough risk out there. Add to that the litany of crypto exchange hacks and exit scams and you have all the ingredients for leverage trading to send the whole thing up in smoke. It is irresponsible for these exchanges to make such powerful tools for losing money available to just about anyone. Just because they can, doesn’t mean they should.
It’s time for crypto exchanges to become more responsible. Or else the regulators will step in. If that happens things may get ugly for the exchanges. Just ask Kik founder Ted Livingston.