A report conducted by independent research consultants Diar, on behalf of ZUBR, the arbitrage hub for digital asset derivatives, indicates that the current levels of leverage allowed on derivatives exchanges today are more akin to gambling than sustainable trading strategies.
Leverage levels of up to 20x can be used by traders to increase potential upsides whilst keeping good risk management. However, the report reveals that the current permitted leverage levels put the majority of traders, who are largely from the retail space, at a disadvantage that risks liquidating their positions within a short window due to Bitcoin’s current nature of experiencing high volatility.
The key highlights from the report are:
- Bitcoin liquidations on popular derivatives exchanges alone have hit nearly $25Bn in nominal value since January 2019 through till the end of March 2020. While recent price fluctuations last month stole headlines having priced out $3Bn in positions, this was only the third-highest monthly loss traders took in the past 15 months.
- Although historical data shows that long positions have an equal opportunity as Shorts with Bitcoin price fluctuations, the lion’s share of liquidations are burdened by bullish traders.
- For 2020, up until the end of March, 75% of liquidations were against the bullish sentiment, causing nearly $5Bn in lost nominal capital in the first quarter of the year alone. Half of the total liquidation value came from untimely long positions during the March price crash.
- Volatility in 2020 has increased the likelihood of liquidations versus 2019 to date for both hourly trading frames and day-to-day. A long leverage position of 100x leaves traders with a 38% risk of being on the wrong side of the trade on the hour, for example. This has increased in 2020 versus 2019 by nearly 28%.
- 100% of positions taken with 100x leverage would be liquidated on a day-to-day trading timeframe, and even 50x leverage would have seen 99% of trades priced out.
- Hourly historical data tells a very different story when leverage is used below 25x. Data reveals that leverage used during intraday trading drops the risk of liquidation to below 3%, highlighting a useful tool to deploy capital better.
- 20x, meanwhile, risks only 1.9% of hourly trading windows being liquidated on long positions and 1.1% on shorts.
Fadi Aboualfa, Managing Director at Diar, said: “The levels of leverage currently being allowed on exchanges are alarming. Our data shows that leverage above 25x is a high-risk position, considering Bitcoin volatility. The findings show that exchanges which allow levels as high as 100x are extremely damaging to traders, many of whom are retail traders.”
Commenting on the findings, Ilgar Alekperov, CEO, ZUBR said: “The trends revealed in this report are essential viewing for traders looking to benefit from digital asset derivatives strategies. It’s important that investors be informed about the exchanges they are using and the trading strategies they are employing.”
You can read the full report here: https://blog.zubr.io/bitcoin-volatility-and-leverage-considerations/