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The Leverage Pandemic: Why it's time legacy models eradicated leverage

Sat, 08/24/2019 - 09:00
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Vaibhav Kadikar
While more crypto trading platforms are striving to ramp up their leverage, the industry should consider getting rid of margin trading altogether
The Leverage Pandemic: Why it's time legacy models eradicated leverage
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What’s on offer? 

Traditional financial players have been exploring crypto derivatives for some time now with recent developments in the area of physically settled Bitcoin futures and consternation around the regulatory approval of such financial products, as we saw in the recent LedgerX debacle.  

The Bitcoin Futures Average Daily Volume (ADV) from the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange, has shown a dramatic increase in the average daily volume of Bitcoin futures contracts, reaching more than 13,600 contracts in May. This surge in trading volume is directly correlated with liquidity -  and higher liquidity makes these products more appealing, attracting potential investors and driving market demand for more products. Still in its infancy, there are a limited amount of crypto derivative products available to retail investors who are forced to deal with costly intermediaries in the form of associated vendors or brokers, giving rise to new companies offering crypto derivatives while trying to amalgamate with traditional investment mechanisms. 

Every week we are seeing more startups, backed by crypto industry heavyweights, offering extraordinarily high leverage of as much as 100x to 150x for crypto derivatives. But what happens when someone gets it wrong and gets burned in the fallout, financially crippled and unable to pay back-breaking debts. The reality is, leverage is an outdated mechanism that may not be required in the future financial ecosystem. It is not, as many refer to it, a necessary evil. 

Why leveraged products' need to be eradicated?

It is well known that the irresponsible trading of derivatives was a core factor in the global financial crisis of 2008. Today, investors can still get stung by using extremely risky leveraged financial products irrespective of their experience or expertise. In spite of this, leveraged products are largely appealing to high risk tolerant investors who believe that this is the only means of generating large potential returns. Legacy models rely on 1 to 1 contracts which require leverage in order to generate high returns to either party. This infrastructure alone is hindering the democratization of the derivatives market and imposing much greater, needless risk on market participants. 

Can you make high returns without leverage?

Providing accredited and retail investors alike with access to crowd wisdom can eradicate the need for leveraged products and unquantified risk. Allowing users to participate in trades with multiple counterparties, with the ability to simultaneously take different positions on a particular asset offers the potential for great returns. In this way, users are not exposed to the risk of losing more capital than committed in the first instance, yet are still afforded with the ability of autonomous common settlement. 

Historically, the investment sphere has been intentionally ring fenced, under the notion that the derivatives sector is too complex for retail investors to understand. Today, with the dissemination of information, and increased calls for transparency and accountability, we are witnessing a shift from decentralized control by backs and proprietary data silos. Taking back control of their financial future, retail investors have the ability to generate wealth on their terms without having to face hefty fees from middlemen. 

What will the future of investing look like without leverage?

By removing leverage and opening the doors to the previously barred segment of retail investors, the future ecosystem will see increased participation and greater liquidity, in turn contributing to greater financial inclusion on a global scale. Removing leverage in crypto derivatives, in tandem with transparent crowd insights will ultimately help to reduce the famous volatility of the crypto sphere and benefit investors in making informed investment decisions. 

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About the author

CEO and Founder of CloseCross, Vaibhav is leading the development of a decentralised prediction market platform that leverages patented blockchain technology to allow users to engage in multi-party trades on a range of financial benchmarks and events. CloseCross drives collective and democratic participation by significantly reducing the cost and complexities associated with traditional financial markets, and by allowing users to view the predictions that others are making in real-time.
Prior to founding CloseCross, he worked as; Global Head of Strategic Partnerships, Digital Business Development and Global Head of Mergers and Acquisitions at multinational companies, including Syngenta, a leading agriculture company helping to improve global food security. Driving corporate development functions in various industries and conglomerates, Vaibhav has held positions at Oerlikon, Unisys and DotComRupees as well as seven years experience in derivative trading. Vaibhav obtained an MBA from INSEAD Business School, France and a Bachelors and Post Graduate Diploma in International Finance from Gujarat University.

Twitter: @VaibhavKadikar