Credit to Author: Elliot Hill| Date: Sat, 13 Jul 2019 10:04:02 +0000
Binance’s margin platform will be the beginning of ‘Binance 2.0’, which will deliver the same unified platform Binance exchange users are accustomed to, but with the added functionality of margin trading via Binance’s advanced trading engine.
However, with Binance being such a powerful force in the cryptocurrency markets, it’s essential to examine what affect Binance’s move into margin trading, including giving traders the ability to short digital assets, will have in the broader crypto-sphere.
Binance Margin Trading Vs. Other Platforms
Binance is currently a custodial asset exchange, where users are in control of their own funds, and place trades and purchase assets using either fiat or many cryptos to crypto pairs.
Conversely, BitMEX, the most widely used cryptocurrency margin trading platform, does not allow standard custodial trading of assets. In other words, traders using the platform trade futures contracts, rather than ever actually owning the underlying asset itself.
With BitMEX, users must transact solely in Bitcoin (XBT), used to credit accounts, open positions, and also for settlement. Instead, with the Binance 2.0 platform, users can move funds easily from their primary wallet, where they own and have custody of their own assets, easily into their margin trading wallet.
This instant transfer of assets between these two wallets will reduce the time taken to open a margin trade, and also open up new avenues of funding for traders looking to open a leveraged position using potentially multiple different assets quickly. Likewise, like other trading products offered by Binance, traders can use Binance Coin (BNB), to settle fees on their leveraged trades.
Popular digital asset exchange Kraken has also offered its user’s margin trading, with up to 5x leverage on Bitcoin, Ethereum, Monero, Ethereum Classic, Augur, Ripple, and Bitcoin Cash. This trading option, highly similar to Binance’s margin trading products, has been widely used; offering low fees and instant settlement.
However, users of Kraken’s margin trading platform don’t have the option to pay fees in a native exchange token unlike Binance, which significantly reduces fees, and increases users likelihood to stay within one platform.
What Is Binance’s Wider Business Strategy?
Binance is already virtually the largest exchange by daily trading volume, so why would it need to expand out into margin trading?
In an official press release, Binance stated that rather than shift its entire business focus, the move into margin trading was similar to how existing traditional finance exchanges offer leverage features on a range of assets. As a result, Binance sees its move as a new tool in crypto-financial services – a step closer to the maturation of the still-nascent cryptocurrency markets.
Binance has also implied that it is looking into launching a futures exchange option with up to 20x leverage initially, which will see a testnet release sometime next week. The move, allowing users to go long or short on major crypto assets, will enable Binance to become more competitive with the likes of BitMEX.
Rippling Effects on the Wider Market
So, how could the world’s largest exchange entering the futures and margin trading market affect the rest of the cryptocurrency industry?
On a most basic level, Binance’s leveraged trading options could now be a competitor to other trading platforms, such as BitMEX or Kraken. The immediate effect of Binance margin trading likely won’t be felt by professional trading platform BitMEX, who offer huge leverage up to 100x on some trading pairs compared to Binance’s mere 3x. However, as the platform matures, Binance may decide to increase this leverage cap, reflected in their plans to offer futures trading with up to 100x leverage.
For exchanges which have a comparatively smaller market share of leveraged trading products, such as Kraken which offers just 5x leverage, Binance’s margin trading options could quickly become a more popular route for traders who are already highly familiar with Binance.
Allowing a huge volume of traders to open short positions on a high volume exchange such as Binance may affect the broader market, however. Some experts have warned that when futures contracts expire, there is a notable volume decline and subsequent price slump in Bitcoin, exerting powerful effects across the entire market. As Binance is such a huge exchange, the potential for this to affect the market is high.
When trading with leverage, traders can lose their funds far more easily than when using regular spot trading. Spot trading is a term used to describe trading between assets you own, rather than those you’ve borrowed. This is because traders who get liquidated or make a loss have irrevocably lost their funds.
Binance, an exchange renowned for its ease of use and beginner-friendly exchange interface, may have to think carefully about how it markets and integrates advanced trading products into its regular interface, to protect investors.
At the same time, as Binance get ready for its futures trading launch, it will be interesting to see how the market reacts, and how it compares with other established futures platforms.