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FTX aims to rock the vast US derivatives market, demonstrating the greatest intervention ever by a cryptocurrency group at the heart of traditional finance.
Exchange established by 3 years ago Sam Bankman FriedWill offer Bitcoin futures to its clients for approval from the US Commodity Futures Trading Commission. This is a contract that allows users to bet on the prices of the most actively traded digital tokens in the world.
The Proposed process Eliminate brokers who have acted as intermediaries between customers and the exchanges on which they trade for the past 40 years. The United States occupies a large part of the global futures market where 29 billion contracts were traded last year. This means that if the FTX plan is approved, its impact can be widespread.
Instead of asking the client to get extra cash called margin, if the transaction goes wrong, the exchange will automatically monitor the market 24/7 and the customer’s balance accordingly. Withdraw.
This could be applicable to anyone trading in the futures market, from farmers fixing corn prices to hedge funds betting on oil prices, if it rewrites the mechanics of futures trading and sticks to it.
At the heart of the existing system FTX The suggestion is leverage. Futures traders usually only put a small portion of the overall value of a position down, which increases potential profits and losses. The chips that market participants put on the table are known as “margins”. Margin is important in leveraged trading as it can complete the participants on the other side of the trade if the bet becomes sour.
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The main difference between the introduced system and the FTX proposal is the approach to margins. In the current framework, if a bet goes too deep into the water, the trader will ask the trader to cut down on additional funds to support a transaction known as a “margin call” by a certain deadline. If the traders meet the margin claim, their trading will remain open. If not, the broker will rewind the position and begin regaining the margin used for the transaction.
With crypto exchanges such as FTX and Binance (a global platform that is not widely regulated), margin requirements for products such as Bitcoin futures are constantly being updated. Traders trade directly with the exchange without going through a broker.
When the user’s margin falls below a predetermined level, the crypto platform will automatically start rewinding the position. Users typically receive alerts when their accounts are at stake, but given the volatility of digital assets, this type of forced clearing event can wipe traders very quickly. there is.
Unlike cryptocurrencies that are traded non-stop, most traditional futures such as tracking commodities close on weekends. However, in most cases, trading is always effective during business days, so some small market participants are worried that they will be wiped out outside business hours based on FTX’s proposal. I am. Margin calls, in contrast, provide room to meet funding requirements.
Automatic clearing is already widely used in the crypto industry, with $ 1.3 trillion worth of Bitcoin futures trading last month alone. Traders can be wiped out very quickly in times of market turmoil, and more leverage will increase the speed at which users are forced to clear.
The following case study is based on a “flash crash” that caused many leveraged Bitcoin traders to move with the wrong foot about a year ago. The trader in this figure has gained a 100x leverage position on Binance by placing $ 2,500 on a transaction that is conceptually worth $ 250,000. When the market begins to fall, they need to invest more and more money to avoid liquidation, even though prices are recovering rapidly.
A short fall in May 2021 hit many retailers Sudden loss.. However, due to automatic clearing, market participants can usually lose as much as they bet on a transaction rather than fulfilling their debt.
Since the CFTC began talks in March, the FTX program has begun intense debate in the United States.
Those who support the FTX proposal believe that it is the next evolution of the market, as technology will inevitably advance in the market like any other society. It promotes competition, democratizes futures trading, and, equally importantly, protects small investors from accumulating debt that they cannot afford. This can have tragic consequences.
On the other side of the debate are those who say that traditional systems provide significant “breathing space” for making important decisions and time to find additional cash. For example, farmers do not have to worry about sudden market movements to close open positions to hedge commodity price fluctuations. You don’t have to invest more than you need to give your customers peace of mind. Exchanges and brokers, which are the intermediaries at the heart of the system, Human judgment To solve potential problems during periods of instability.
The CFTC takes time because it examines every step in the chain and understands how it works and produces results. No decision may be made this year. It is possible to allow both models. However, as investors explore Bitcoin futures, they may face more suggestions.
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