Nithin Kamath, co-founder and CEO of stock broking platform Zerodha, flagged the risks associated with crypto derivative exchanges as they operate in a regulatory grey area.
Kamath, in a post on X today, November 26, said, “Crypto derivative exchanges exist in regulatory limbo. A bit like Schrödinger’s cat—neither fully regulated nor unregulated.” This ambiguity, according to the 46-year-old billionaire, is being exploited in dangerous ways and therefore needs to be fixed.
How are crypto derivative exchanges risky?
Nithin Kamath highlighted three ways in which these “unregulated” exchanges can exploit investors, thus costing them their hard-earned money.
1. No protection if something goes wrong
Unlike in the stock market, where in case a broker cheats you, shuts down or withholds your money, you can complain to Sebi, no such safety net exists for the crypto derivatives platform.
Kamath said there is nothing that you can do if something goes wrong.
2. You don’t know who is trading against you
Kamath said you run the risk of not knowing who is on the other side of the order, and this loophole, he warned, can be exploited by the platforms.
In crypto F&O, Kamath warns that the platform itself can be your counterparty.
This means: If you lose, the platform wins. This is similar to dabba trading or CFDs, where the “house” takes the other side of your bet.
“In many cases, the platform itself can be the counterparty to all trades, like dabba trading or CFDs. If the platform is the house, the incentives are distorted. It’s good for the platform if the customer loses money because every customer win is the platform’s loss,” Kamath said in the post.
3. Extreme leverage
Kamath added that to make matters worse, some of the crypto platforms offer 100 to 200 times leverage, making it an even more dangerous proposition given the highly volatile nature of the crypto market.
“At that level, even a small move is enough to make you go bust. Considering the volatile nature of crypto, this is all but guaranteed,” he warned.
Regulators around the world have warned about risks to financial stability, as crypto becomes more connected to mainstream finance. However, despite that crypto prices have been on a tear this year, with Bitcoin hitting a series of record highs before cooling off lately.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
