Crypto Leverage Trading a ‘Major Problem,’ Says Former FTX US President
Brett Harrison, the former president of FTX US, is gearing up to launch a new perpetual futures exchange called Architect in the coming weeks. However, this venture will notably exclude markets for cryptocurrency. In a recent interview with Decrypt, Harrison expressed his concerns about crypto leverage trading, labeling it as “irresponsible” and a “major problem.” His remarks align with the growing worries among analysts about excessive leverage within the volatile crypto market, especially following the flash crash on October 10 that saw a staggering $19 billion wiped out from the derivatives market.
What’s Different About Architect?
– Focus on Traditional Assets: Architect will offer perpetual futures on a variety of traditional assets, such as:
– Stocks
– Foreign currencies
– Rare metals
– Stablecoin Use: While digital assets won’t be listed, Harrison mentioned that users can utilize stablecoins as collateral.
– Gradual Rollout: Initially available to institutions, the exchange will eventually welcome retail investors.
Understanding Perpetual Futures
Perpetual futures, commonly known as perps, are derivative contracts with no expiration date. Traders can engage in leveraged bets—both long and short—on the direction of an asset’s price. While successful trades can lead to significant gains, losses can likewise be amplified, and positions may be liquidated if the market moves unfavorably. Harrison remarked, “Perpetual futures have been extremely successful in crypto,” yet he cautioned against the high leverage typical in that space—often reaching up to 1,000 times initial capital—which he views as dangerous.
The Risks of High Leverage in Crypto Markets
Harrison firmly believes that offering massive leverage fosters a gambling mentality that endangers retail investors. He stated, “It encourages people to blow out their accounts as fast as possible,” emphasizing that the true purpose of a derivatives exchange should be to establish safe, sustained open interest rather than merely collecting liquidation fees. Unlike Architect, where leverage will be capped at 25X on lower-volatility assets, the crypto derivatives market sees traders participating with exorbitant leverage, sometimes up to 1,001X.
A Growing Concern
Reflecting on recent events, he pointed out that the incentives for risky trading still persist. High leverage, coupled with a lack of adequate backstopping procedures, raises concerns about future liquidation cascades. “If the exchange allows for irresponsible leverage and doesn’t have good procedures in place, then you will end up with liquidation cascades,” Harrison warned.
In summary, while perpetual futures might offer lucrative investment prospects, the challenges posed by crypto leverage trading cannot be overlooked. The unprecedented risks of high leverage must be mitigated to protect retail investors and ensure long-term stability in the market. As the industry evolves, it’s crucial to prioritize responsible trading practices over the allure of quick gains.