FTX Lowers Leverage Trading Limit to 20x to Encourage Responsible Trading

After a slew of recent criticisms that blame leveraged trading for volatility, FTX responded by changing their approach to the controversial trading tactic.

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BSCNews
on
July 27, 2021
Category:
Blockchain News

Limits on Leverage Trading

FTX has lowered the limit on the amount of leverage that can be applied on trades from 101x to 20x. The  cap was lowered to minimize devastating losses incurred by irresponsible trading. Sam Bankman-fried, the CEO of FTX, announced the new policy on his personal Twitter account.

Bankman-fried stated leverage trading is not "an important part of the crypto ecosystem, and in some cases it's not a healthy part of it.”
Source


Why Leverage Limits Were Lowered by FTX

In a series of Tweets, Bankman-Fried said that high leverage trading makes up only a small percentage of the exchange’s trading volume. He added that the average amount of leverage used on the platform is only about 2x.

In the recent price crash across the board for crypto assets, leverage trading services were often blamed for the massive price volatility. The CEO noted that in his opinion liquidations were more to blame for this volatility, but the issues taken with leverage trading were still valid.

Bankman-fried stated that lowering leverage is “a step in the direction the industry is headed, and has been headed for a while.”


Not a Lot of Leverage Here

Other crypto exchange platforms such as Coinbase limits leverage trading to a certain segment of its customers. Stock and crypto exchange platform Robinhood does not allow leverage trading for cryptocurrency transactions. 

Writing on the Wall

In an article by CNBC on May 25, 2021, leverage trading was identified as the main cause for massive price swings in cryptocurrencies. While this belief is not necessarily shared by FTX, the CEO made it apparent that market trends are shifting towards a more regulated leverage space.

The negative attitude surrounding leverage trades and FTX’s vision to lead the crypto space are largely what justified the change to Bankman-fried.


What is Leverage Trading?

Leverage trading allows traders to increase their exposure without having to pay the full purchase price. Credit is provided by a broker for a percentage of the value of the transaction. This mechanism allows for increased risks to be taken by speculators for a chance at increased profit. 

A 20x leverage would result in liquidation if the asset moved 5% in the opposite direction. A 5% movement is relatively common in the crypto market, indicating the high level of risk associated with these trades.  

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