The largest liquidation event in cryptocurrency history occurred on Friday, with more than $19 billion worth of trades being returned in just 24 hours, according to data from CoinGlass. In the days that followed, industry experts conducted a post-chaos study, and high leverage was highlighted as a potential risk to the long-term health of cryptocurrency markets.
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The surge in popularity of Hyperliquid, a decentralized exchange that specializes in trading perpetual futures, has made access to leverage in cryptocurrencies more accessible than ever before, leading to rival exchanges vying for their own leverage offerings. Some experts believe this creates systemic risk, and asset management firm Bitwise is even considering changing strategy as a result.
Leverage allows traders to bet using borrowed money, creating the risk of forced liquidation if things go wrong. Often, leverage is combined with perpetual futures trading, which allows traders to speculate on the direction of an asset – called “buying” or “selling” – with derivative contracts that never expire.
Combined, these trading strategies create very significant risks, which are amplified and exposed by big moves like Friday’s. In traditional markets, restrictions and ratings are imposed on users trying to reach the highest levels of leverage. Similar systems exist on centralized exchanges, where Binance, for example, requires users to pass risk tests to trade with any leverage at all. However, decentralized exchange Hyperliquid has grown rapidly this year, offering up to 40x leverage with no disclosures or KYC checks required – that’s part of its selling point.
“What we are seeing, especially in fraudulent markets, is that leverage is the point of competition with these exchanges,” Aryan Chikhalian, head of research at venture capital firm CMT Digital, told Decrypt. “Marginal competition leads to systemic risk, in that sense.” “They compete by lowering proportions of potentially tied collateral or marginal assets, or increasing their hindsight liquidation thresholds as a result of this underlying competition.”
This competition can also be seen with the recent emergence of rival decentralized exchange Aster, which offers an impressive 1,001x leverage on Bitcoin.
As a result, James Butterville, head of research at CoinShares, told Decrypt that the volume of derivatives trading, which allows the use of leverage, has doubled in size over the past year. He said that when compared to spot trading, derivatives represent 73.7% of trading volume on central exchanges.
Source: Market intelligence platform IndexBox
