A Diar report found that the current levels of leverage allowed on crypto derivative exchanges are currently more similar to gambling rather than sustainable trading.
The report was prepared by independent Diar advisors on behalf of the ZUBR crypto derivatives arbitrage hub and revealed the existence of highly leveraged positions deemed harmful to crypto traders.
These levels of leverage are used by traders to increase potential profits, but current levels seem excessively high.
Levels of leverage of up to 20x can be used to increase potential benefits while maintaining good risk management, but the report reveals that the current levels of leverage allowed on crypto derivative exchanges are significantly higher, putting most traders at a disadvantage that risks liquidating their positions in a short time due to high price volatility.
In addition, many of these traders are from the retail sector, so they are not professional traders.
Data on the use of leverage in the crypto market
The report also reveals that between January 2019 and the end of March 2020, bitcoin liquidations on the most popular derivatives exchanges alone reached almost $25 billion in nominal value.
In addition, although historical data show equal risks between long and short positions, due to fluctuations in BTC prices, most of the liquidations occurred on bullish positions.
From January to March this year, 75 percent of liquidations occurred against bullish sentiment, causing nearly $5 billion of nominal capital lost in the first quarter alone. Half of these occurred during the price collapse in mid-March.
In addition, increased volatility raised the likelihood of forced liquidations compared to last year: for example, a 100x long leveraged position leaves traders with a 38% risk of being liquidated, compared to 28% last year.
On the other hand, a leverage of less than 25x reduces the risk of liquidation below 3%, while for example, a 20x leverage generates a liquidation risk of 1.9% on long positions and 1.1% on short positions.
In light of these figures, Diar’s CEO, Fadi Aboualfa, said:
“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”.
ZUBR’s CEO, Ilgar Alekperov, commented:
“The trends revealed in this report are essential viewing for traders looking to benefit from digital asset derivatives strategies. It’s important that investors be informed about the exchanges they are using and the trading strategies they are employing”.