Bitfinex readies 100x leverage and Binance margin trading beta claims its first victim
Margin trading is in, raising questions about how the trend may impact crypto markets.
If the cryptocurrency markets aren't sufficiently risky and volatile for your tastes, there's always margin trading for that extra adrenaline rush (this is not financial advice).
In a nutshell, margin trading lets users borrow money to put behind their trades. If the price goes up, the gains are magnified by that extra borrowed money. If the price goes down, they stand to lose all their initial capital very quickly.
"Leverage" refers to how much people can magnify their trades. The more leverage, the higher the potential gains for correct bets, but the faster you get liquidated on incorrect bets.
A small amount of leverage can be useful for sophisticated investors who want to hedge against other positions, while a lot of leverage can be useful for gamblers who feel like going all out on crypto market bets.
Bitfinex currently offers up to 3.3x leverage, and now it has plans to crank that all the way up to 100x. This puts it in the same league as BitMEX, which has made a name for itself by offering 100x leverage.
Responses have been mixed, but Bitfinex CTO Paolo Ardoino assures that Bitfinex will put appropriate protections in place including a "steep margin requirement". Essentially, that means someone who wants to go big will need to have a decent amount of money to start with.
But it will still have to be a learning experience, Adroino concedes. Of course, 100x leverage in cryptocurrency is a never-ending learning experience in its own way.
According to The Block, Bitfinex says it will mostly be a hedging tool rather than a gambling mechanism, but people are dubious as to whether 100x leverage is really necessary for hedging.
"There's nothing wrong inherently about 100x," said B2C2 trading firm CEO Max Boonen to The Block. "But as a commercial hedger you want lower leverage margin. The larger investor wouldn’t want to take the risk of 100X, typically."
"They don’t want to go balls to the wall."
At the same time, Binance, the world's number one exchange by volume, has its own plans for margin trading. It's currently in an invite-only beta, but it had its first liquidation last weekend when someone tried to short Bitcoin and got swept away by the massive price rises of the time.
Margin trading is starting to make its way around the crypto-sphere, which raises some concerns about the potential for foul play and price manipulation on loosely-regulated exchanges and how widespread margin trading could impact the cryptocurrency markets.
On the plus side, it also stands to be an interesting source of new information for data-hungry market-watchers.
Disclosure: The author holds BNB, BTC at the time of writing.