Leverage or Margin Trading

Leverage Trading Enriching Cryptocurrency Exchanges

There is an apparent rush by exchanges towards margin or leverage trading. Leverage trading is where a trader can borrow funds from the exchange to trade more. For example, if a trader wants to buy Bitcoin worth $1,000 at say $5,500, but they only have $500 worth of BTC; he can borrow the remaining balance from the exchange and open the trade.

If the $1,000 in Bitcoin increases in value to say $9,000, the trader can liquidate. Once done, the exchange automatically deducts the initial loan billed when BTC was trading at $5,500 plus other charges meaning the trader keeps the rest as profit.

Leverage trading Is a Double-Edged Sword

Unfortunately, leverage trading is a two-way street. If the value of Bitcoin drops, the lender will first recover their money which means the trader loses. To quantify, in a 3X leverage positions means if prices shrink by 33.3 percent, the position will automatically liquidate because the exchange would not want to lose the loaned funds.

As noted by a twitter user:

“The rise of leveraged trading has transferred wealth from retail into an exchange and ‘profitable traders’ accounts. There will never be another alt season as would be alt investors have an easier and faster way to completely blow out their accounts rather than ‘investing’ in trash. Altcoins don’t need to trade to zero; Once there is no volume and liquidity. Your altcoins will become worthless. Nearly all altcoins are down relative to Bitcoin.”

Exchanges Turn To Leverage Trading

In the recent past, crypto exchanges have been activating margin trading. BitMEX is the leader, offering margin trading opportunities for altcoins like Ethereum or Cardano (ADA) aside from Bitcoin. However, Binance, the leading virtual currency exchange by adjusted trade volumes and users, was the latest to enable margin trading after months of trials.

During the launch which happened earlier this month, Binance’s CEO, Changpeng Zhao, said:

“This is another step in providing an inclusive cryptocurrency trading platform catering to the needs of both advanced institutional traders and retail traders under the same roof. We are providing a new tool in the financial services and cryptocurrency markets to help amplify results of successful trades.”

Binance’s co-founder, Yi He, noted that traders should approach the margin trading option with caution since they are capable of suffering losses in equal measure when seeking to make profits. Unfortunately, with the current volatility, the risks are higher than benefits.

Preparing for the “Altcoin Season”?

Notably, with cryptocurrency enthusiasts anticipating better altcoin prices in days ahead, with leverage trading, the biggest beneficiaries will be supporting exchanges and not the retail traders.

According to a crypto analyst:

“This is one of my alt-season indicators. A bullish cross of the 365d moving average of [altcoin market cap / BTCUSD]. It’s crude and imperfect, but easy to pull up on Trading View. Altcoin season is not guaranteed, if it happens, I can’t see it happening till end of 2019.”

Since the beginning of the year, crypto analysts have been prophesying the coming of an altcoin season.

In a tweet, a skeptic noted:

“[retail leverage traders presuppose] that retail money flowing into alts is what starts alt season. Not so. Alt season starts when larger players who want to multiply their BTC kick it off. Dump retail money follows. As long as alt markets can be manipulated, retail will take the bait.”

Another added:

“I personally know 3 guys who all had a decent amount of BTC and alts at the beginning of this year. At 8K-ish they had 2-3X their holdings. And learned about leveraged trading through YouTubers. Now they have less than what they started the year with.”