Market Crash Got You? At Least You’re Not Holding Leveraged Tokens

A liquidity crunch lead to large losses for traders holding FTX Exchange's leveraged BULL tokens.

Key Takeaways

  • FTX Exchange BULL tokens, tokens representing 3x leverage contracts, failed to track prices as liquidity dried up on exchanges.
  • The 3-hour lag in prices on Binance resulted in large reported losses for traders.
  • Congestion on the Ethereum network caused further issues. Liquidity providers on Binance were unable to receive emergency inventory from FTX to solve the trading imbalance.

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Traders holding the heavily leveraged BULL tokens saw massive losses when Binance failed to update the token’s price for more than three hours. Dozens of traders called on Binance and FTX, the exchange that issued the tokens, to reimburse them for their losses.

Leveraged Tokens Take a Hit

The crypto market took a heavy hit last week, experiencing one of the biggest sell-offs in its history. Cryptocurrency experienced over a $50 billion wipe out in market capitalization, leading many to believe that the industry was set for an unprecedented bear market.

While most lost money on the rapidly deteriorating prices of cryptocurrencies, a significant number of traders fell victim to network problems.

The ones that incurred the most losses were traders holding the heavily leveraged tokens issued by FTX exchange. The exchange’s leveraged tokens are ERC-20 tokens that represent a 3x leveraged crypto position—for example, EOSBULL is a +3x leveraged EOS token. 

It’s on the back of these leveraged contracts that the exchange saw a massive rise in popularity this year, becoming the fifth largest crypto trading platform by volume last month.

Sam Bankman-Fried, the CEO of FTX, told CryptoBriefing last week that the fact that traders can move their ERC-20 leveraged positions around the blockchain and trade them on other exchanges is what made them popular in the first place. 

However, as promising as these tokens can be, they are much more sensitive to price movements and are considered extremely risky. That’s why last week’s huge flash dump managed to wreak havoc among traders holding and buying FTX’s leveraged tokens, with those owning EOSBULL tokens experiencing the biggest losses.

Namely, the price of EOSBULL and ETHBULL tokens on Binance decreased drastically more than the price of their underlying coins, causing a slew of liquidations. Traders complained that the price of the EOSBULL token lost half of its value in a single day, despite the price of EOS increasing 6.5%. 

What Happened With EOSBULL and ETHBULL?

A Twitter user took to Binance Helpdesk to complain about the inaccurate price discovery of the EOSBULL token on its platform. The user pointed out that when the price of EOS hovered around $2, the price of its 3x leveraged token EOSBULL was $16.20. 

However, as the price of EOS increased to $2.23, the price of EOSBULL fell to $8.28. 

Those that reached out to Binance’s customer service were told to submit tickets on the platform’s support page and wait for a response from the company’s agents. Dozens of traders called on Binance to close all bull/bear leveraged tokens on its platform until the issue is resolved, but the exchange has so far kept all of the tokens open for trading. 

Other traders complained about the price of EOSBULL tokens on Binance, saying that similar discrepancies were also noticed with ETHBULL. 

On Mar. 12, Binance failed to track the correct price of the ETHBULL token from FTX, misleading traders who had positions. “Those who bought during this time lost money unfairly,” a trader said last week.

EOSBULL price difference on Binance
Graph showing the difference between the real price of EOSBULL and its price on Binance, via Twitter

A few days later, Binance Customer Support responded to some of the issues traders raised, saying they will share more updates once more information is known.

“With regard to the actual crash in value relating to ETHBULL. We are proactively communicating with the FTX official team in terms of the issues [that] happened last week, as soon as there is any update, we will keep you posted,” they said

FTX, the exchange that issued the tokens and where Binance was supposed to get their price from, responded to the issue a few days later, apologizing for the inconveniences traders experienced. 

According to the company, all of the leveraged tokens issued by the exchange performed as expected on Mar. 12.

Table of Bear and Bull token performance
Table showing the performance of FTX’s leveraged products on Mar. 12, via FTX

The exchange explained that an issue occured when some of the Binance leveraged token markets lagged the fair value of BULL tokens during the day. 

“While ETHBULL did end up at the correct price by the end of the day–roughly $80—there was a period where ETH had already fallen and ETHBULL had not yet fallen enough,” the company explained. 

This happened around noon UTC time, just when ETH had dropped around 32%, and lasted around three hours. During that time, ETHBULL’s price on FTX’s market had fallen around 75%, but it’s price on the Binance ETHBULL vs USDT market had only fallen about 65%.

FTX said that the reason why Binance markets took longer to fall was that customers were buying ETHBULL tokens and liquidity providers ran out of ETHBULL on Binance. While this problem is usually solved by creating more ETHBULL tokens and sending them to Binance, the markets on Mar. 12 were unusually busy. 

A congested Ethereum network meant that the newly created ETHBULL tokens didn’t make it to Binance for some time, preventing all of the liquidity providers from selling the token down to its fair price. All four of the exchange’s “positive tokens”—EOSBULL, ETHBULL, XRPBULL, and BULL—experienced liquidity crunch. The exchange’s “inverse tokens,” EOSBEAR, ETHBEAR, XRPBEAR, and BEAR, did not experience this problem.

“We’re sorry for the lack of liquidity in BULL tokens during part of the market move yesterday.  We hope to provide consistent, strong markets, and are striving to show more liquidity next time than we did this time,” said FTX.

While Binance is yet to issue an official statement regarding the matter and say whether or not it will refund the users that lost money on the trades, FTX apologized and announced that it will begin implementing several changes. 

The portal that transfers the leveraged tokens to Binance will now begin paying more gas during heavy network times in order to ensure that the tokens reach the platform in time. Liquidity providers on Binance and the Leveraged Token creation portal will also start keeping more inventory of the leveraged tokens, they said.

Ethereum Congestion Continues to Cause Problems

This isn’t the first time that congestion on Ethereum caused problems for the wider crypto market. The blockchain underlying the world’s second-largest cryptocurrency has been notoriously prone to congestion despite promises of scalability.

The price losses Ether experienced last week highlighted some of the problems with the network. With fears that the heavily-anticipated Ethereum 2.0 might never arrive, many dApp developers and traders are rushing to other blockchains and tokens to avoid falling victims to Ethereum’s congestion.

We are yet to see how the recent lags on the network hold on during the impending bear market. 

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