FTX Slashes Leverage Limit from 100x to 20x — Community Suspects Competitors Will Follow Example
FTX CEO Sam Bankman-Fried told his Twitter followers on Sunday that his crypto exchange has lowered its margin trading limit from 101x to 20x. Prior to the change, FTX supported 50x, 100x, and 101x leverage but Bankman-Fried said these high leverage positions represent “a tiny fraction of volume.”
FTX CEO Announces Cutting Leverage Limits, 2x Leverage the Most Common
FTX customers will have to adjust to changes as the crypto-asset exchange has dropped its max leverage rate from 101x to 20x this weekend. Of course, the formerly supported 50x, 100x, and 101x positions are considered high leverage. Bankman-Fried told his 233,000 Twitter followers the news on Sunday when he stressed that “an effective margin system is integral to an efficient economic system” and added that “there are limits to everything, though.” Bankman-Fried added:
There’s been a bunch of discussion recently around high leverage (> 20x). Nearly every crypto derivatives exchange allows it, and nearly every one will say the same thing: It’s a tiny fraction of volume and positions.
Margin trading is often called leverage trading because it allows a trader to leverage their position and multiply it. A margin trader with 100x leverage can multiply either profit or loss by 100 times. High leverage trading has been considered risky and regulators from a few countries have limits on the amount of leverage an exchange can offer. With 100x leverage, even smaller than usual swings in price, can either give a trader nice profits or liquidate them in a matter of seconds. At FTX, Bankman-Fried says liquidations represent a very small part of the exchange’s action.
“For us, like liquidations, it’s way less than 1% of our volume and positions,” Bankman-Fried remarked. “It’s not a significant part of the exchange. It’s also not what chiefly contributes to volatility. Liquidations do, [on] some exchanges (although generally not so much FTX). But > 20x is small.” The FTX CEO further explained the average margin position held on the trading platform. Bankman-Fried stated:
The average leverage used on FTX is ~2x.
Crypto Proponents Respond to Exchange’s New Leverage Limit
A number of crypto proponents and industry veterans discussed the decision FTX made and some people claim a lot more exchanges will follow FTX’s lead. “FTX has decided to remove all leverage over 20x from their platform,” Morgan Creek Digital’s Anthony Pompliano tweeted. “The assumption would be [that] most other platforms will follow suit over time,” he added.
Galaxy Digital’s Mike Novogratz replied to Pompliano’s tweet and said: “20x on an 80 vol instrument is still insanity.” Investor and financial writer Lyn Alden also responded to Pompliano’s tweet and remarked: “It’s like a bar implementing a 10-drink maximum per customer after some bad weekends. Lower than before but still like… a lot of alcohol.”
.@binance futures started limiting new users to max 20x leverage last Monday, Jul 19th, 7 days ago. (We didn’t want to make this a thingy). In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks. Stay #SAFU. 🙏 — CZ 🔶 Binance (@cz_binance) July 26, 2021
The CTO of Bitfinex and Tether, Paolo Ardoino, decided to speak on the subject as well. “Finex could do 21%. Feels the right limit for bitcoin,” Ardoino tweeted. “Jokes aside, it makes sense to limit leverage. On a 100x position, a 0.5% market move liquidates you. Our upcoming x-margin [is] meant to reduce leverage to 25%. Glad to see FTX being [a] first mover.”
The head of product at Messari, Qiao Wang liked the idea that FTX was self-regulating. “Reducing leverage from 100x to 20x won’t materially impact system-wide leverage,” Wang wrote on Sunday. “But optics matter. I’d like to the world to see us not as a giant greedy casino but as an industry capable of self-regulating. Good 1st step by FTX and would love to see other exchanges follow suit.”
What do you think about FTX’s decision to lower leverage from 101x to 20x? Let us know what you think about this subject in the comments section below.