The Crypto Trades That Amplified Gains Are Now Turbocharging Losses — WSJ
By Vicky Ge Huang and Caitlin OstroffThe rally in crypto prices this year was boosted by a large heap of debt, with traders using leverage to amplify their gains. Now, after a punishing selloff in the past two weeks, the dangers of those bets are becoming apparent.Investors have never had more ways to place complex wagers on crypto. In some cases people can put down $1 of their own money to gain exposure to $100 of bitcoin. It is a strategy that can produce windfall profits — when the market breaks the borrower's way. If it goes in the wrong direction, traders can be on the hook for big losses and can see their holdings liquidated if they don't post sufficient funds.Daily total liquidations on crypto exchanges have been on the rise this year. But in October, they shot up to a record high, according to data from CoinGlass, after President Trump's surprise tariff announcement against China triggered a crypto selloff that compelled exchanges to close out underwater positions."In the end, it really comes down to the fact that you can invest with more means than you have, but it also means that you will get punished for not managing your risks accordingly," said Nicolai Søndergaard, a research analyst at crypto data firm Nansen.Pressure on leveraged traders has been one of the main story lines in crypto's recent skid. Bitcoin has lost roughly 27% of its value since hitting a record high above $126,000 in October, with investors' retreat from riskier trades dragging the largest cryptocurrency to a recent $92,000, its lowest level since April."The last two weeks have been really rough for a lot of people," said Kevin Wan, a 33-year-old individual investor who has been trading cryptocurrencies since 2013.Wan started selling bitcoin short, betting on its decline, once the token touched $106,000. He borrowed on a crypto exchange to give him 20 times leverage on his trade. When bitcoin fell, Wan said, he made about $120,000."I've learned from previous cycles to put money away in places where you can't really access it," he said. "Because it's really easy to get into a mindset of revenge trading and then just having a downward spiral of performance when the market is hard."Bitcoin's recent crash has also pulled down the shares of crypto-treasury companies. For much of the year, these companies sold stock or borrowed money to plow the proceeds into bitcoin, ether and other cryptocurrencies.Strategy, a firm that pioneered the use of corporate funds to accumulate bitcoin, has tumbled 29% in the past month. BitMine Immersion Technologies, an ether-treasury company backed by Peter Thiel and run by veteran Wall Street strategist Tom Lee, is down 35%. Both stocks are well off the pace of bitcoin itself, which has fallen 13% in that same period.Regulated institutions and fast-money traders alike are now pushing complex strategies such as options and futures, so-called treasury stocks and even crypto lending.In years past, U.S. investors haven't had access to many of the riskier strategies that crypto investors have used in other markets. But that began to change this year, with Trump's re-election ushering in a more crypto-friendly Washington.This summer, Coinbase, the largest U.S. exchange, launched perpetual futures, a type of financial contract that never expires and lets traders bet on digital tokens' rise using up to 10 times leverage. Cboe plans to launch bitcoin and ether continuous futures with 10-year expirations in December.Crypto lending is also making a comeback. The practice, a staple in the market's 2021 run-up, looks a lot like traditional banking. A lender takes in deposits from one set of customers, and then lends those funds out to a different group at a higher interest rate than it pays depositors.But in the crypto markets, lenders typically offer depositors much higher yields than those available in dollar-based bank savings accounts. When crypto markets tumbled in 2022, many of these lenders collapsed.The dollar-denominated value of outstanding loans from centralized crypto lenders and decentralized lending platforms ballooned to a record high around $74 billion at the end of September, exceeding the previous record of $69 billion set in the fourth quarter of 2021, according to research from Galaxy Digital.While bitcoin's recent selloff has wiped out some leveraged bets, traders expect it to tick back up."Until there's some sort of overriding body that says this is where you have to cap leverage, I just can't see that changing," said Jake Ostrovskis, head of over-the-counter trading at crypto firm Wintermute.Write to Vicky Ge Huang at [email protected] and Caitlin Ostroff at [email protected]