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On the day of one of the cryptocurrency market’s worst debacles, Alex Holland woke up until a wave of messages from friends and family. They knew he had made a big bet recently that the prices were going to drop.
But when he went to verify his account on the Binance online exchange, he saw that the value of his leveraged bet against Ethereum was declining rather than reaping gains that were a few times greater than the declines in the second largest crypto. -change.
“I couldn’t stop blinking,” said the 59-year-old Canadian, who became paraplegic after a skiing accident. “I thought it was just a bug and they were going to fix it.”
At the end of May 19, Ethereum would drop by around 20% and the so-called Dutch down token dropped by around 85%. The value was so low that it appeared as zero on the price charts.
Binance’s Ethereum tokens fell on May 19, although the underlying coin was also sold on that day.
In a way, this is an uplifting tale as old as Wall Street – of retail speculators burned by Byzantine derivatives – amplified by a lack of regulation, grotesque market plumbing, and extreme volatility in the world. $ 1.3 trillion crypto.
It is difficult to know exactly how much value has been wiped out. But a growing group of disgruntled Binance users are now organizing to pressure – with a combination of social media and legal threats – the exchange to make up for their losses. Regulators have also taken note, with Binance increasingly under scrutiny in Asia, North America and Europe.
Holland’s records show that between April and May 19, he invested around $ 2,700 in bearish tokens through a series of trades. Including his previous transactions, he estimates his investment to be around $ 10,000.
Leverage tokens are touted by crypto exchanges as an easy way for enthusiasts to make oversized bets without having to deal with collateral or margin requirements. On Binance, the product uses futures contracts to offer long or short exposure to cryptocurrencies with a unique twist: a leverage ratio that floats between 1.25 and 4 times. This means, in theory, that a 20% dip in a room should result in a 25% to 80% gain.
The world’s largest crypto exchange touts unpredictability as a feature, not a bug, to prevent front-running. But it has also made traders question how they are being handled, especially during the manic swings that characterize the market as well.
Service disruptions
Holland’s experience was typical on May 19. Descendant tokens linked to cryptocurrencies Litecoin and Tezos lost money despite betting in the right direction. Polkadot’s token ended up worth less than three cents, plunging 95% from the previous day. At one point, tokens wagered on and against Ethereum were down about 75%.
May 19 was a day of uproar overall, with crypto platforms like Binance and Coinbase suffering regular trade disruptions after Elon Musk’s negative tweets and tightening restrictions in China have prompted investors to flee.
As more traders wanted to withdraw bearish leveraged tokens, Binance said the cash outflows caused the leverage ratio to increase in some cases. When the program was forced to reduce its short exposure in a rocky, illiquid market to lower the ratio again, it ended up losing money due to market conditions.
In other words, the product was forced to continue cutting positions at the worst possible time. On that day, Ethereum down tokens rebalanced 21 times, the majority of which occurred over half an hour.
“We should note, however, that there were no identifiable issues or errors with the BLVT during the period,” a spokesperson said in an email. “Binance users are informed in advance of the risks associated with any trading activity,” including through a training video and a test of their understanding.
In the depths of massive selling, the platform suspended trading for most leveraged tokens. It no longer allows subscribing or exchanging tokens when rebalancing.
The product is somewhat similar to leveraged exchange-traded funds, which typically rebalance at the end of each day to maintain particular exposure. The difference is that Binance tokens only rebalance when the leverage ratio swings outside of the 1.25 to 4-stroke range and based on a proprietary algorithm that determines the ratio.
One problem with not having regular rebalancing is that the product would naturally become more leveraged the moment the market opposes it, warns Tim Leung, a professor of applied mathematics at the University of Washington who has written a book on ETFs at leverage.
“It’s too opaque,” he said, generally commenting on a retail product structured this way. “An investor looks at the historical leverage ratio and thinks it should be 2x, but there is no guarantee that the future leverage ratio will be two.”
Read more: Binance Booms as crypto trading unfolds beyond the reach of nations
There is not much that retail traders can do through regulatory recourse. Binance operates as a constellation of entities in multiple jurisdictions, and its terms state that any dispute must go through individual arbitration in Hong Kong and cannot result in class actions.
For Holland, this is another blow to his long-standing faith in cryptocurrencies. After initially accumulating coins while running a crypto mining platform, he lost all the money he had invested in QuadrigaCX, a Canadian exchange that wiped out at least $ 125 million in client money during of its collapse in 2019.
When it came to choosing another exchange, he believed he couldn’t go wrong with the biggest in the crypto world.
“It was a significant amount of money for me to pass away, even though I had predicted everything correctly,” he said from Calgary. “Considering my situation, this was my only move to retire and now it’s pretty much all gone.”
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