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Binance vs. FTX: The Leveraged Tokens Delisting Episode

This was supposed to an article about the miraculous listing and delisting of a special group of tokens in less than a quarter by Binance, a sequel to this GAINS Research article on the Binance Effect. What we have now is a possible case of bad faith involving an upcoming exchange, FTX, which opened up its playbook to the biggest crypto exchange out there, Binance, only to have its biggest product cloned by the latter.

1) Listed and Delisted in less than 3 months

On January 17, 2020, FTX Leveraged Tokens (BULL, BEAR, ETHBULL & ETHBEAR) were listed on Binance. 3 months later, on March 31, Binance delisted these tokens, citing a lack of understanding of how leveraged tokens work.

“The main reason for delisting is we find many users don’t understand them. Even with pop-ups warning users each time, people still don’t read it,” Zhao tweeted. “Given they are some of the most actively traded tokens, it is bad for business to delist them. Not an easy choice. But … Protecting users comes first.”

This probably holds the record for the fastest listing and delisting in the history of Binance, and possibly crypto. Users had 3 options:

● Trade out of their existing Leveraged token positions.
● Withdraw their Leveraged tokens.
● Continue holding their Leveraged tokens until the trading pairs are delisted. Choosing this option meant waiting 14 days to have your account credited with the equivalent value held in each leveraged token at the time of delisting.

2) What went wrong?

Did we have to get to this point? Of course not. Binance could have done better, especially with introducing Leveraged tokens to its community. When the announcement was made, Binance made a feeble attempt to explain things to a crypto community that unfortunately isn’t into much due diligence. Harsh? Nope. Binance only put a link to a detailed guide on the FTX website hoping that users would leave Binance.com and go to FTX.com to read more. To compound this, the link to the FTX article wasn’t a hyperlink. Any interested user looking to learn more would have to copy and paste in a web browser. Ironically, the links to Binance Fees and Rules stood out as hyperlinks. Yeah right, Binance.

3) Binance announcing its own Leveraged Tokens four months later

Was it an act of sabotage towards the FTX issued leveraged tokens? Was Binance really protecting its community or did it delist these to make them unpopular, and eventually list theirs, possibly with no hitches so that its community would blame FTX? In response to the decision to delist, FTX said in an update: “Leveraged Tokens are complicated products, and Binance doesn’t want to manage the user education and customer support for them.” Is Binance now ready to handle the education?

4) So what are leveraged tokens?

Leveraged tokens, similar to leveraged ETFs, are simply ERC20 tokens that automatically rebalance to maintain a certain magnitude of leveraged exposure of a certain asset. That’s a lot of technical talk. Think of it this way. If the price of Bitcoin rises from $10,000 to $11,000, this would be a 10% increase which would give the investor a 10% return on the spot market. A leveraged Bitcoin token multiplies the returns by three. That means, if the price of Bitcoin increased by 10 percent, the net loss or net gain from the trade would be multiplied by three when trading the leveraged token.

Why would anyone opt for leveraged tokens as compared to just trading with classic leverage? These tokens reduce exposure when losing money, greatly reducing the chance of liquidation. No more liquidations. This is great, right? Looking at data from Bybt.com, FTX exchange has perennially low numbers when it comes to liquidation as compared to other futures platforms that do not offer leveraged tokens. So why did people end up losing? Education is the simple answer! A simple line at the top of the announcement saying Leverage tokens were not meant to be HODLed would have sufficed. There were some traders on Binance who bought these tokens to hold long term. Leveraged tokens by nature are used for short-term moves in the market. This warning came only after the delisting took place.

5) What happened to FTX’s leveraged tokens on Binance?

We’ll consider the FTX BTC BULL and BEAR tokens for this section. These tokens have 3X Long exposure on the BULL tokens and 3X Short exposure on the BEAR tokens.
When it was listed on Binance, the BULL token was trading around $11,750. Bitcoin price was $8,800 at the time of the mid-March crash which saw its price fall to $4,000. The crash led to the BULL token trading just above $1,000. By the time it was delisted from Binance, 1 BULL token was trading at $1300, an 89% reduction. That explains the disgruntled community, although the token did go as high as $18,100 in February.

BULL tokens do well when prices go up, and the BEAR tokens do well when prices go down. So, if Bitcoin fell we should have an increase in the price of BEAR tokens right? Wrong. When it was listed on Binance the BEAR token was trading around $24. Bitcoin was trading at $8800 at this point. By the time it was delisted from Binance, 1 BEAR token was trading at $13 even though Bitcoin was trading at $6400 at this time.

When BTC was at $10,300, BEAR was at $14.
Then, when BTC was at $9,700, BEAR was at $2.

If a fall in price for Bitcoin is supposed to be favorable for the BEAR token then why this fall in value?

6) Automatic daily rebalancing

This is why leveraged tokens lose their value over time. Rebalancing occurs as the price of an underlying asset is constantly fluctuating. In addition, any token will rebalance if an intraday movement exceeds the given threshold value to reach back its target leverage. As a token’s price is fluctuating, the leverage changes from 3x. However, since the FTX leveraged tokens preferred leverage is 3x, a rebalancing must occur to move the leverage back to 3x to avoid liquidation risk.

Source: Deribit Insights

Technical part below:
Each leveraged token reinvests profits if it makes money. If it loses money, it sells off some of its position, reducing its leverage back to 3x in order to avoid liquidation risk. This sell-off reduces the price of the underlying leveraged token which can explain how the value of 1 BTC BULL token can fall all the way from $12,000 to just above $1,000 in 3 months. On 13th March, as Bitcoin price was falling to $3,940 and causing liquidation on Futures platforms, rebalancing meant that the position of BULL had to be sold off to reduce the exposure and bring it back to 3x leverage and keep the positions from being liquidated. So technically, holding these tokens meant that you weren’t liquidated, but the value of the tokens you held reduced greatly as a result of rebalancing. Deribit Insights offers a very easy-to-follow explanation for this very technical topic.

It’s interesting to note that while Bitcoin has recovered fully from the Black Thursday crash, BTC BULL is trading at $3,550.

Imagine buying these tokens to hold. Rekt, right? No, super rekt is about right! But did they have to be?

7) What now?

It’s a shame that this happened to investors. What is the ultimate aim of this article? We want Binance to do a much better job with explaining to its community what Leveraged tokens are, and how the new Binance Leveraged Tokens (BLVT), BTCUP and BTCDOWN, will do a much better job than FTX’s. Binance also claims its BLVT will not maintain its optimal leverage at 3x like FTX’s, but rather move between 1.5x and 3x, which means rebalancing will only be on an as-needed basis, such as during extreme market movements.

Who will hold Binance accountable to ensure that they are not rebalancing or moving leverage around only when it favors them, especially given the stories we’ve heard about the infamous auto-deleveraging when the market fluctuates?

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