“The overall value of daily purchases and sales of […] derivatives [now] far surpasses the daily volume of actual cryptocurrency transactions”, The New York Times reports citing researchers from Carnegie Mellon University. Derivatives notably include ‘perpetual swaps’, which are bets on future price changes that do not expire. These swaps are currently offered up to 125 times leverage, which means that a $1,000 investment could be instantly translated into a $125,000 bet on the future price of Bitcoin.
As it is off-limits to a growing number of national regulators, leading trading platforms like FTX, Binance an BitMEX have moved their headquarters around the globe as ‘global nomads’ to places like Hong Kong, Malta, the Seychelles and Panama. Regulators are especially wary about the millions of non-professional retail traders that take extremely risky positions. They attract customers with 30-second sign-up, offer game-like dashboards, and give away prizes like IPhones and Teslas.
With daily transactions of tens of billions, the platforms earn “a transaction fee based on the forced sales caused when the price of the underlying cryptocurrency moves against the trader”. This happened to an estimated $20 billion during the recent crash in mid-May. As one critic comments: “The math of highly volatile instruments is that the house almost always has to win”, adding that from his perspective, “these are unregistered casinos”. In addition to profiting from forced liquidations in positions, executives of the platforms “also own related companies that do algorithmic trading to instantly cash in on market distortions that occur during these sell-offs”, which they defend with the argument that “this keeps the market liquid”.
Looking at their lucrative business and earning models in the most volatile of all financial markets, it does not come as a surprise that the trading platforms are not short of cash or investors: FTX just raised $900 million last week to expand global operations, which values the company currently at $18 billion.