It’s hard to believe that Binance is only just two years old, given the steep trajectory of its growth to dominate the market for cryptocurrency exchanges. The most recent development, that the company is launching margin trading, looks set to solidify this position further. While other exchanges such as BitMEX or Bitfinex are already offering margin trading, Binance has access to a far larger existing user base. What will be the impact of this move on the crypto markets?
What We Know So Far
The first indicators that margin trading was on the way surfaced in a tweet on May 24. Binance was ostensibly teasing its new user interface with a screenshot post, but Twitter users were more excited to see the appearance of a button for margin trading. The same day, TechCrunch also confirmed via a spokesperson that margin trading will be introduced, and the company released a blog post outlining margin trading and how it works.
Margin trading offers the opportunity to borrow funds to make bigger trades, with the goal of making bigger profits from trading wins. However, the reverse is also true - with the amplified opportunity for gains comes the increased risk of losses. Because the crypto markets are notoriously volatile, margin trading can be even riskier.
Therefore, it’s best deployed by more experienced traders who understand how to use risk management strategies to offset the chance of losses. Because borrowed funds incur interest, margin trading is generally most effective in short-term trades.
As things stand, we don’t know the specifics of the margin offering. For example, how much leverage will be provided? Will it be on all tokens or just a limited range of BTC and the major alts?
Shooting for the Moon
Given the current bull run which is attracting increased trading activity, Binance’s move could now be the catalyst for an unprecedented altcoin season. The indicators are already there that Google search interest in altcoins is up to the levels of the last run in late 2017. According to CoinMarketCap, in November 2017, the global market cap of all cryptocurrencies was about the same as it is now and with Bitcoin holding a similar market share. So, the stage appears to be set for the bull run to continue.
However, in 2017 the crypto markets were considerably less mature. There were far fewer options for margin and derivatives trading compared to now. Because margin trading increases buying power, it’s often used to diversify portfolios as a strategy for offsetting loss risk. This could spell good news for alts, as exchange users will be looking for new channels to generate trading wins.
The opportunity for leveraging gains on altcoins like the BNB token or other rising stars has the potential to attract more traders. It could open up the crypto markets to traders from traditional markets like Forex, where margin works to leverage smaller market movements than we usually see in the volatile crypto markets.
Hedging the Risk
On the flipside, margin trading enables short selling, and in the past, it has been blamed for drops in the price of Bitcoin. However, this is a fairly spurious complaint. Short selling happens in traditional markets and is thought to contribute to overall stability. After all, bets on the market in either direction will work to cancel one another out.
Furthermore, market manipulation by traders has been proven to be rife in crypto. For example, bots are used for wash trading to artificially inflate trading volumes. Binance CEO Changing Zhao (CZ) has previously spoken out about the exchange’s policies and practices on wash trading and other market manipulation tactics, highlighting how independent researchers have found no evidence of this happening. A very recent report by Bitwise backs up CZ’s position that his exchange is clean of wash trading.
All the signs are present for a promising altcoin season, and with its new margin trading offering, Binance looks set to capitalize on the opportunity. However, it’s inevitable that markets will always go up and down. What’s important is that Binance’s move into margin trading demonstrates that the crypto financial markets are maturing, providing more sophisticated options for traders. As a market leader, the company is setting an example to its peers in how to grow sustainably and robustly.