Why don't big crypto exchanges like margin trading?
What is margin trading?
One of the characteristic features of the credit economy is the use of margin lending or debt trading. This is not uncommon in traditional financial markets, especially when working with derivatives. When using leverage (borrowed funds provided by a broker or platform), a trader can significantly increase the potential winnings, but the risks increase significantly.
At the crypt market, the "stress degree" is higher due to super-volatility. Relative growth rates of the exchange loans segment are high. For example, Japan's Financial Services Agency (FSA), which acts as a regulator, reports an increase in the country's margin trading (including derivatives) from $2 mn in 2014 to $543 mn in 2017.
Given the uncertain legal status of many exchanges, their diversity and different lending solutions on the trading floors, we can say that margin trading inevitably has an impact on the market. It remains to be seen how much influence this has.
Leverage for the crypto industry
To begin with, let's look at who in the crypto industry provides the opportunity to trade with leverage. Let's choose 10 large exchange platforms and consider the possibility of trading in "debt", as well as the cost of funding.
The picture is ambiguous: on the one hand, just over half of the exchanges support margin trading. On the other hand, the size of the leverage is in most cases conservative: it roughly corresponds to the margin requirements of brokers for reliable stocks on the stock market (the so-called "blue chips"). There are only two exceptions in the top ten - Hong Kong HitBTC and Bitmex. And the first exchange does not provide funds independently, for this purpose, a third-party company Weltrade is used.
It turns out that from the whole sample only Bitmex provides the opportunity to conduct high-risk trading with leverage. The crypt trading exchange is popular among speculative traders. Leverage ratio of 1 to 100 is only true for bitcoins, on average for six top-crypt currencies the leverage is 1 to 40. Bloomchain has sent a request to ten listed exchanges, but at the time of writing the article has not received an answer.
Low margin requirements are related not to the crypt currency itself, but to trading in derivative contracts (term or perpetual cryptographic futures). Moreover, being in an offshore jurisdiction allows bypassing regulators' requirements. The business model of the exchange combined with a large share of borrowed funds makes trading volumes huge. In terms of daily turnover, Bitmex often ranks first in the world, with trading volumes reaching $23 billion last month (according to Coinmarketcap).
An alternative source of data on margin lending can be the investigation of the New York City prosecutor's office with regard to cryptographic trading. According to the document, one of the criteria in the analysis of platforms was considered the possibility of margin trading).
Crypto exchange
Margin trading on crypto exchanges. Source: New York City attorney's report.
It follows from the report that many large exchanges do not practice giving shoulders to clients. On traditional trading platforms, where providers act as brokers, it would be surprising if there are no shoulders, rather than their presence. Among the exchanges, only Poloniex and Bitfinex support margin trading.
Interestingly, just a month after the investigation of the cryptographic exchange, Poloniex decided to limit margin trading: it stated that it closes such trading first for corporate clients from the U.S. and then for all clients from the U.S. jurisdiction.
Such a course of the exchange crypto currency explains the close attention of the SEC. The regulator's concern is clear: it sees increased risks in margin lending, which in the cryptographic industry is also combined with a risky underlying asset. On the other hand, the exchanges themselves fear instability in the volatile market and see no point in additional growth of risks for clients. With the volatility, which was fixed in some coins in 2018, traders will have enough risk and no leverage.
Influence of futures on bitcoin
Derivative crypto tools - such as futures and options - can be a potential problem, as they are the default shoulder suppliers. All cryptographic derivatives currently on the market are computational, and there is no real supply of cryptographic currency. Therefore, such derivatives cannot have a significant impact on the spot market.
An exception - the first exchange futures on bitcoin, which at the end of last year launched the Chicago platforms CME and CBOE. These are legal instruments registered with the SEC. Their status allows large institutional investors to work with the market, which means that the futures can become an instrument of influence on the underlying asset, even with a non-deliverable nature. A similar situation happens with some commodity futures.
However, so far the influence of "legal" futures can be neglected: in addition to low popularity of instruments, this segment has a high margin - about 40%. This makes the leverage too small for margin trading: "1 to 2.5".
Problems of small traders
Now the situation with marginal lending on the spot market of cryptocurrency can be called stable. Most large exchanges try to avoid risky margin transactions, or provide conservative conditions so as not to find themselves in the hands of regulators. Some players sell services through third-party solutions, but all this does not make the market too "heavy". There are examples and big shoulders, but mostly they are either offshore representatives or forex brokers. This does not mean that margin trading is not without the attention of authorities. Regulators closely monitor the risks: both in the real estate or equity market, and in alternative investments.
When you talk about margin trading, you can draw a parallel between stock and cryptor market. In the stock market shoulders are allowed, but their size is small and limited by regulators. For example, the ItInvest broker has minimum margin requirements for Tesla's ordinary shares - 37% (leverage 1 to 2.7). In more risky markets, the restrictions are not as strong. The largest shoulders can be seen in the sphere of nonexchange derivatives, betting, forex brokerage.
What is happening in the cryptocurrency market? Players in the spot market (exchanges) try to limit the amount of risk, but there are many intermediaries who persistently offer derivative contracts, betting, etc. Although risky spot market implies high shoulders, in practice the situation is the opposite.
It can be assumed that as legal exchange derivatives for cryptocurrency develop, margin requirements will soften and the cryptocurrency market will become somewhat closer to the stock market.
In the future, the margin load may have some impact on the cryptocurrency: provided the trading volumes and derivatives on them increase against the background of more loyal attitude of stock exchanges to the shoulders. However, now the level of credit for transactions in the crypt market is rather a problem for small traders. The size of margin positions is simply not enough to make a stronger medium-term movement in price.