FTX.US announced this week that it will acquire LedgerX, a U.S.-licensed crypto derivatives exchange. If the deal goes through, it will pave the way for FTX.US to expand its offering and allow its US retail investors access to more derivatives.
FTX is currently the sixth largest cryptocurrency exchange worldwide, according to data from CoinMarketCap. It operates a separate site in America – FTX.US – to comply with US regulations. The product line on FTX.US is limited compared to its global counterpart.
What are crypto derivatives?
Derivatives are negotiable contracts that allow investors to bet on the rise or fall of a price, without actually owning the underlying asset. These are complex trading tools that are best suited for advanced traders.
For example, if you believe that the price of Bitcoin (BTC) from $ 47,000 to $ 48,000, you could enter into a contract to buy BTC for $ 48,000. If BTC did increase, you would have increased by $ 1,000. On the other hand, if you think the BTC is going to go down, you can use derivatives trading to sell it short and make money if the price goes down.
Another aspect of derivatives trading is leverage, which essentially allows you to borrow money to multiply your earnings. As a result, you would also multiply the losses which is one of the reasons why this type of trading is risky. Let’s say you have $ 1,000 to trade and you pull out 100 times as much of that money to buy Bitcoin. You would be able to buy $ 100,000 worth of BTC and increase your profits a hundredfold. But, if the price of BTC only dropped 1% and you were about to lose more than your initial investment of $ 1,000, you would lose all the money you invested.
According to research from Carnegie Mellon CyLab University, the trading volume of crypto derivatives is five times greater than normal trading. The report also warned that derivatives trading increases overall market volatility and often results in large losses for less experienced traders.
If you plan to trade derivatives or buy leveraged tokens, make sure you understand how it works and what the risks are. Cryptocurrency investing is already risky, and derivatives can make it even more so.
FTX.US is moving cautiously with regulators
This deal would give FTX a greater presence in the US market – and allow it to bring its experience in international crypto derivatives trading to the US LedgerX is already regulated by the Commodity Futures Trading Commission to sell derivatives in the US – United
However, crypto derivatives have come under fire from regulators around the world. This is one of the reasons FTX reduced the amount of margin traders could access from 100x to 20x in July. The example above showed how 100x leverage meant that investors could lose a lot of money with just a small fluctuation in price.
FTX Founder and CEO Sam Bankman-Fried has repeatedly stressed the importance of working alongside regulators. He recently told Markets Insider that the goal was to be “allies rather than enemies of regulators.”
As US officials debate the increased form cryptocurrency regulation should take, this conciliatory approach can be helpful. However, for US investors looking to access derivatives, it will all depend on how FTX.US deploys LedgerX products and how the regulations evolve as a whole.
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Emma Newbery owns Bitcoin and Ethereum.
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