Crypto Leverage Trading a ‘Major Problem’, Says Former FTX US President

Brett Harrisonthe former president of FTX US, is set to launch a new perpetual futures exchange in the coming weeks, but it will not include markets on crypto.

In fact, the former FTX US executive said Decrypt he believes that the leveraged trading offer, where borrowed capital is used to multiply gains and losses, on volatile crypto assets is “irresponsible” and becoming a “major problem”. His comments echo those of analysts who have recently raised concerns about excessive leverage in the crypto market after the flash crash on October 10thwhen a record $19 billion was cleared from the derivatives market.

Harrison’s new exchange, called The architectoffers perpetual futures on traditional stocks, foreign exchange markets, and other asset classes, such as rare metals. While digital assets will not be listed on the exchange, users will be able to use some stablecoins as collateral, he said. In the coming weeks, it will become available to institutions, before opening to retail investors in the “intermediate future”.

Perpetual futures, or perps, are derivative contracts without an expiration date that allow users to place leveraged bets, using borrowed capital, on the direction of an asset. Traders can open long positions to bet the price of an asset will rise, or short positions to bet it will fall, using it as a hedging strategy against risk in the spot market.

If an asset moves in the direction that favors the trader, his position will increase to the multiplier of the selected leverage. But if the trader is wrong, his losses will also be multiplied-and in the worst case, his positions can be liquidated, or closed by force.

And all is well and good, in itself, according to Harrison, who said that the Architect was inspired by how “extremely successful and useful” perpetual futures have been in the crypto world. The problem starts when exchanges offer large amounts of leverage — 100 or even 1,000 times a trader’s initial capital — in highly volatile markets prone to large swings, the former FTX US exec said.

“I think it’s a big problem. I think it’s irresponsible. It encourages people to throw out their accounts as quickly as possible,” Harrison said. Decrypt. “The point of a derivatives exchange is to allow people to establish safely and securely, in a long-term fashion, open interest. The objective is not to try to throw accounts and collect settlement fees. I think it is much more of a gaming platform than an actual futures trading platform.”

The architect offers a maximum of 25X leverage on trading positions, said Harrison, and only on the less volatile assets offered by the exchange – such as the EUR / USD trading pair. More volatile assets, such as Tesla stock, can only have a maximum of 8X leverage, he said.

It is a far cry from the crypto derivatives market, where the rush to make quick gains on 100X or even 1,000X leverage has increasingly become the norm.

Perpetual futures in the crypto market now generate $1.3 trillion a month in volume, according to DefiLlama. And most of the rise of crypto perps has come thanks to decentralized exchanges, such as Hyperliquid and Asterlowering the barrier to entry.

In traditional finance or in centralized exchanges, users are required to complete customer knowledge procedures (providing personally identifiable information), fill out risk assessment forms, or pass quizzes. Such requirements do not exist in the world of decentralized finance and decentralized exchanges, or DEX, meaning that anyone with a crypto wallet can access 1,001X leverage on the Aster DEX.

Purveyors and proponents of leveraged trading on decentralized exchanges argue that they are leveling the playing field, democratizing access to these markets beyond just institutional investors and hedge funds.

Gleb Kostarev, co-founder of business app Telegram Blum, said earlier Decrypt that adding perpe to their platform was a “no-brainer” due to high demand for the trading strategy. He too he said that the Blum app offers 100x leverage as a way to entice retail traders, as leverage is a more attractive proposition for those with smaller portfolios to invest.

In other words, crypto exchanges that offer high leverage through perps are just giving retail traders what they want.

BitMEX, the Seychelles-based exchange widely credited with inventing crypto-based perpetual futures, did not respond. to Decryptrequest for comment regarding Harrison’s statements. Hyperliquid, Aster and Blum have yet to respond.

After the record cancellation in the crypto derivatives market earlier this month, Harrison argues that the incentives remain in place for retail traders to be hurt, and for more liquidation cascades to wreak havoc on the crypto market in the future.

“If the exchange allows irresponsible leverage and doesn’t have good procedures to enforce that leverage, then you’re going to end up with liquidation cascades,” Harrison said.