What's up guys and welcome to wall street millennial with cryptocurrency prices seeming to have lost steam, since the insane run that they've had in 2020? Crypto traders have, in some cases lost a lot of money. Dogecoin, for example, has lost nearly two thirds of its value since its peak in may. It currently trades around 25 cents. However, it's important to note that it is still many times its value from the beginning of the year when it traded below one cent.

Bitcoin is a more mature cryptocurrency than dogecoin, which allowed it to stop the bleeding after losing about half its value rather than two thirds, even so not having reached a new high since mid april has made some crypto traders change their strategies when cryptocurrency prices started pulling Back in april, and may many traders turned to products like this one from the crypto exchange binance. This is a leveraged token, tied to ripple similar to three times leveraged etfs available on stock exchanges, this product and others similar to it market themselves as a way to get leveraged long or short exposure to various cryptocurrencies binance currently offers many of these types of products. Some long and some short, instead of giving an exact number as to how much leverage they provide finance, only claims that they give between 1.25 and 4 times leverage at any given time based on various factors like market volatility and investor redemptions and subscriptions. To the token, the real leverage varies within the range on its face.

This seems like a great way to trade cryptocurrencies. If you have a view that certain coins are going to go down in the near future, it is exactly what many traders did when bitcoin started. Losing steam in march and april, some traders predicted a decline and bought binance leverage down bitcoin tokens sure enough. The prediction came true and bitcoin, plunged by 50 of its value by may, but people who invested heavily in these leveraged down tokens, not just in bitcoin but also in ethereum and other coins, saw their investments lose money too.

The tokens that were supposed to go up if cryptocurrencies go down also went down. Obviously this led to many very angry finance customers. So what actually happened here - and why did these inverse leverage tokens perform so badly and what should have been their time to shine to fully understand these questions? We first have to understand what exactly these down tokens are: finances history with leverage and inverse tokens started. In march of 2020., the ceo of finance cz zao banned similar leverage tokens made by rival ftx under the premise that traders did not fully understand the risks involved.

With them, he said that, in an effort to protect traders using the binance exchange, they had delisted the popular tokens. He even went as far as saying that protecting users comes first and that the ftx leverage tokens were quote bad for business, but only two months later he did a 180 by listing his own same type of product on binance, leveraged, bitcoin and inverse bitcoin tokens were Some of the first to appear on the exchange bidet said that these listings only came after careful consideration of user requests and evaluation of existing leveraged products. Eventually, responding to market demand, finance listed dozens of such tokens, both leveraged and inverse leveraged on a wide range of cryptocurrencies. A major difference between finance's inverse tokens compared to the existing fcx inverse tokens is that binance's tokens are centrally provided.

That means that traders have to just trust that binance is doing what they say. They're doing with traders, money finance does offer some information as to what the leverage and inverse leverage tokens actually do. According to their website, finance leverage tokens allow you to gain leverage exposure to a cryptocurrency without risk of liquidation. This allows traders to take on leveraged positions without having to actively manage their equity in order to maintain margin compliance in their targeted leverage ratio.

The idea is similar to that behind leveraged etfs, such as 3x leveraged s, p, 500 etfs. These etfs are rebalanced every day to maintain three times leverage ratio each day. By doing this, they greatly reduce the risk of the fund getting liquidated or going to zero. The only way for a three times, leverage s p 500 etf to go to zero - is if the s p goes down by 33 in one day as long as that doesn't happen, the s p could go down 33 over the course of multiple days and the Leveraged etf won't get completely wiped out.

The rebalancing every day allows for this and that's the same idea behind rebalancing with crypto leveraged tokens. The binance leverage tokens use rebalancing, but slightly differently than the leverage etfs. They use a complex and undisclosed algorithm to determine when to rebalance the tokens factors determining the rebalance schedule include market volatility and the reductions in subscriptions to the token at any. Given time.

Binance does give a few theoretical examples of how rebalancing might work in the real world, but the bottom line is that the rebalancing process is incredibly non-transparent and basically they can do anything. They want with rebalancing. This lack of transparency allowed for a disaster of epic proportions. For holders of these leveraged inverse tokens this past april and may bitcoin peaked on april 15th, and many people sensed that bitcoin's upward trend would have a reversal in may that came true and bitcoin lost half its value.

This should have been great news for anyone forsightful enough to own the inverse bitcoin leverage token. However, that is not what happened after a slight bump in price, from a few cents to a high of not quite 10 cents, the btc down token fell right back down to its previous levels, along with regular bitcoin. Now that bitcoin is trading at about 33 000. Only half of its previous high, the btc down coin is also trading at or around its all-time lows.

Naturally, tons of traders who were holding btc down were incensed at the outcome of their bearish bet on bitcoin and other cryptocurrencies on reddit and other social media sites. People complained that the way these leveraged tokens were set up was almost scam-like when the underlying coin goes up. Obviously, the inverse tokens go down, but in april and may, when the underlying coin went down, the inverse tokens also went down cc. Zao in binance explained what happened by saying that the losses were caused by their rebalancing algorithm, dealing with rebalancing at the same time as redemptions and subscriptions.

Basically, that means that, at the same time as the crypto markets were falling sharply, certain traders were redeeming their tokens for other coins or buying new tokens with their other coins whenever redemptions or subscriptions occur. The total assets of the token fluctuates which necessitates finance going into the crypto futures markets and adjusting the total exposure to maintain the leveraged target. The dynamics of the markets and binance's algorithms had the outcome that the leveraged tokens had their values eroded. According to binance, the algorithm worked as intended, and traders were warned in advance of the risks.

The cryptocurrency markets are largely unregulated and there is little to protect traders from malpractice, market manipulation or even outright fraud. If finance's tokens had, in fact not worked as intended, and traders lost money due to finance's rebounding algorithms breaking, there would be no way of anyone knowing. That is one reason that retail investors should stay skeptical of the institutions that are involved in the finance and trading industries. There is very little accountability, and history has told us that that usually means that retail traders end up holding the bag, but where binance here clearly made a misstep was in how it handled justifying having its own leveraged tokens when it had just de-listed ftx's tokens.

Saying that they were too risky for traders, they said at the time that, even though ftx provided warning notices for their securities traders rarely read them because of that many trades were lured into taking on more risk than they thought by ftx's leveraged tokens according to ftx Binance just did not want to manage user education and customer support for ftx's leveraged tokens. Two months later, finance had listed their own leverage tokens. This allowed them to take all the fees associated with leveraged tokens for themselves effectively pushing out a competitor. Binance's public reasoning was that they had somehow engineered a safer product than ftx's tokens.

This would obviously suggest to traders that binance had done something novel to advance the technology of the leveraged tokens. In the end, any innovation that binance did bring to the table failed to make any difference. Binance's second misstep was in their marketing of these inverse leverage tokens as providing negative exposure, so that traders can benefit when the underlying cryptocurrency goes down. They do provide disclosures about the risk of the complex derivatives used and the strange outcomes that are possible.

But what happened in april and may, with cryptocurrencies tanking across the board, is exactly the type of scenario that these inverse tokens are supposed to benefit from. Even if disclosures are made, it's unethical to market a product that doesn't even work in the perfect scenario when it should the bottom line is that whenever you put your money on the line, you can never fully trust the established wall street heavyweights. To do what's fair. For you or your portfolio, alright guys that wraps it up for this video, if you like, the content, make sure to smash that like button and subscribe for future videos also leave a comment saying what you think about binance's major flaw in the meantime.

Thank you. So much for watching and we'll see you in the next video wall street millennial, signing out.