Crypto Traders Loved Big Leveraged Bets Until Inexplicable Crash

Crypto Traders Loved Big Leveraged Bets Until Inexplicable Crash

On the day of one of the cryptocurrency market’s worst routs, Alex Holland woke up to a wave of messages from friends and family. They knew he had made a big wager recently that prices would fall.

But when he went to check his account on the online exchange Binance, he saw that the value of his leveraged bet against Ethereum was sinking rather than reaping gains a few times greater than the declines in the second-largest cryptocurrency.

“I just kept blinking,” said the 59-year-old Canadian, who was left a paraplegic after a skiing accident. “I thought it was just a bug and they’d be fixing it.”

By the end of May 19, Ethereum would plummet roughly 20% and Holland’s so-called down token tumbled about 85%. The value was so low it appeared as zero on price charts.

In a way, it’s a cautionary tale as old as Wall Street — retail speculators burned by byzantine derivatives — amplified by a lack of regulation, croaky market plumbing and the extreme volatility of the $1.3 trillion crypto world.

It’s hard to know exactly how much value was wiped out. But a growing band of disgruntled Binance users are now organizing to pressure — with a combination of social media and legal threats — the exchange to compensate their losses. Regulators have also taken notice, with Binance facing increasing scrutiny in Asia, North America and Europe.

Holland’s records show from April to May 19 he put roughly $2,700 in the bearish tokens through a series of trades. Including his previous transactions, he estimates his investment totaled around $10,000.

Leveraged tokens are pitched by crypto exchanges as an easy way for amateurs to make outsized bets without the hassle of managing collateral or margin requirements. On Binance, the product uses futures to offer long or short exposure to cryptocurrencies with a unique twist: A leverage ratio that floats between 1.25 and 4 times. That means, in theory, a 20% plunge in a coin should translate into between a 25% and 80% gain.

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The world’s largest crypto exchange touts the unpredictability as a feature, not a bug, to prevent front-running. But it’s also prompted traders to question how they are managed, especially during the manic swings that are also a feature of the market.

Service Disruptions

Holland’s experience was typical on May 19. Down tokens tied to the Litecoin and Tezos cryptocurrencies lost money despite betting on the right direction. Polkadot’s down token ended up worth less than three cents, plunging 95% from the prior day. At one point, both the tokens wagering on and against Ethereum were down roughly 75%.

May 19 was a day of tumult overall, with crypto platforms including Binance and Coinbase suffering disruptions to regular trading after negative tweets from Elon Musk and tightening restrictions in China sent investors fleeing.