A report conducted by crypto research firm Diar calls crypto trading on derivative exchanges “more akin to gambling than sustainable trading strategies.”
Ironically, the report was paid for by crypto derivatives exchange ZUBR.
The report states that Bitcoin liquidations on popular derivatives exchanges have hit nearly $25 billion in nominal value since January 2019 through till the end of March 2020. Historical data shows that long positions have an equal opportunity as Shorts with Bitcoin price fluctuations but the bulk of liquidations are by bullish traders. According to Diar, 20x leverage puts the majority of retail investors at a disadvantage.
Fadi Aboualfa, Managing Director at Diar, commented on the report:
“The levels of leverage currently being allowed on exchanges are alarming. Our data shows that leverage above 25x is a high-risk position, considering Bitcoin volatility. The findings show that exchanges which allow levels as high as 100x are extremely damaging to traders, many of whom are retail traders.”
Leverage levels of up to 20x can be used by traders to increase potential upsides however, the currently permitted leverage levels put the majority of traders, who are largely from the retail space, at a disadvantage that risks liquidating their positions within a short window due to Bitcoin’s current nature of experiencing high volatility.
To quote the report:
“In 2019, despite a year of favorable recovery in Bitcoins price, liquidations amassed to nearly $20 billion, 65% of which were on long positions gone in the opposite direction. For 2020, up until the end of March, 75% of liquidations were against the bullish sentiment causing nearly $5 billion in lost nominal capital in the first quarter of the year alone. Half of the total liquidation value came from untimely long positions during the March price crash.”
Perhaps the takeaway is retail doesn’t really know what they are doing but it is fun to gamble.
If you are a trader you love volatility. But according to the report, 100x leverage equals 100% loss.
“Volatility in 2020 has increased the likelihood of liquidations versus 2019 to date for both hourly trading frames and day-to-day. A long leverage position of 100x leaves traders with a 38% risk of being on the wrong side of the trade on the hour, for example. This has increased in 2020 versus 2019 by nearly 28%. 100% of positions taken with 100x leverage would be liquidated on a day-to-day trading timeframe, and even 50x leverage would have seen 99% of trades priced out.”
The report states that there is a point when leverage is no longer a risk management tool but a risk in itself.
So who is the big winner in all of this? The exchanges.