The United States has cracked down on regulation around cryptocurrency over the past few years. The frustrating part? The very laws meant to protect citizens can make it extremely difficult for them to have trading careers in crypto, even costing them potential profits — at least in my case anyway — as a tax-paying individual trying to abide by the current rules and regulations in an honorable fashion.
Some trading styles and strategies may function well under the current U.S. exchange landscape, given trading vastly differs from person to person, but options are drastically more limited as a U.S. citizen. In particular, significant difficulties exist around trading crypto derivatives in the U.S., such as futures, for top crypto assets including bitcoin (BTC) and Ethereum (ETH) with leverage. This article almost entirely refers to derivatives trading with leverage.
I do see value in regulation on many fronts. Certain laws, such as anti-money laundering (AML) and Know Your Customer (KYC) regulations can help ensure legal use of money, or in this case, bitcoin (BTC) and other crypto assets. I see the need for national protection and can empathize with the rationale behind regulation in various instances, especially given the amount of scams and nefarious activity within the industry. I also realize many people may be unprepared for trading and lose money by jumping in. There, however, must be a better middle ground than the current regulatory atmosphere in crypto. Citizens must also be free to make their own decisions at some level, provided they acknowledge the potential risks inherently held within trading and crypto.
Part of the difficulty lies in the uncertainty. I am not a legal professional, so I do not know exactly why I am banned from using the top exchanges in the industry. Other average folks likely feel the same. Is the ball in U.S. crypto exchanges’ court to provide better opportunities, or is regulation at fault, scaring off exchanges based in other countries while also deterring U.S. exchanges from adding such capabilities? All I know for certain are the difficulties I face.
Technology has ushered in greater access to financial opportunities for everyday folks who simply wish to legally follow their passions. Decades ago, these same opportunities did not exist. Now they exist, but the average citizen is unable to take full advantage at a time when profit potential is the greatest. By the time U.S. citizens can partake in these other opportunities, if ever, the highly profitable early adopter years may be over, leaving the average person out of the party.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Two Premier Exchanges, Two Bans
BitMEX, one of the top crypto derivatives exchanges, reportedly began prohibiting American customers in 2015, based on U.S. regulatory requirements, according to the exchange’s comments to media outlet Cointelegraph.
Binance, another top crypto exchange for both spot assets and derivatives, announced a ban on all U.S. traders in June 2019, although motivation for the ban lacked clarity. Binance subsequently opened a U.S. branch, called Binance.US, although the U.S. version of the platform only provides a small fraction of the features seen on the restricted Binance platform.
The Scene On Exchanges
Three main crypto exchanges exist for U.S.-based crypto traders: Coinbase (and its Coinbase Pro platform), Gemini and Kraken. Several others exist with more or less the same options and features, including Binance.US, but these arguably stand as the main three. These exchanges primarily offer spot assets with little or no leverage, and no derivatives trading. (Leverage lets you trade with size larger than the money held in your account, based on borrowed funds.)
BitMEX, Bybit, FTX and Binance are four of the top coveted exchanges that ban U.S. persons from their platform, as stated in their terms and conditions. These exchanges offer derivatives, such as futures and options trading, giving traders a host of added, and sometimes necessary, opportunities when trading. Kraken even has a separate futures trading platform, which oddly, U.S. customers are barred from using.
Evidence hints toward regulation as the culprit behind the denial of service to U.S. participants, although, as mentioned, it is hard to find credible straight-forward answers. The U.S. sits on a list of banned regions, alongside China, North Korea, Iran and a small number of others, on Bybit’s terms of service. The other exchanges tout similar banned regions.
The mentioned U.S. exchanges have come a long way, and do offer great service in many ways, but they fall short in several categories, likely due to regulatory requirements and grey areas.
Why Trading Is So Difficult Using U.S. Exchanges
The first issue — U.S-approved platforms have very few opportunities for shorting assets. Shorting an asset essentially means you are betting on the asset’s price going down, profiting on the decline. This is a common market activity and can be a necessity, depending on your trading style. In a down market, you could go months without snagging any trades void of shorting capabilities. This essentially limits your trading opportunities by 50% in some cases.
Another massive problem is the situation around exchange fees. U.S. exchanges charge high trading fees, making it very difficult to profit on small price moves, also called scalping in the trading world. Kraken, for example, charges a 0.16% trading fee for limit orders, and a 0.26% trading fee for market orders.
(Side note for non-traders: A market order refers to when you post a price at which you want to buy or sell an asset. The order order may not fill if the asset’s price does not fluctuate to your desired level. A market order simply fills your order at the best available asset price on the exchange right away.)
A 0.26% fee charges you that amount every time you buy and every time you sell. If you buy one bitcoin at $10,000, Kraken charges you $26. When you sell that bitcoin, Kraken charges you another $26. Not too bad if you are trading larger price swings, but if you are trying to profit by scalping $100 moves on bitcoin, you are giving up more than 50% of your profit per trade — and that’s if you win the trade. If you lose a trade, your loss is $52 greater than the downside of your position. You can try using limit orders, but that is still $32 in fees total to get in and out of a position, and that is if sufficient liquidity exists to get your orders fully filled at a good price.
Kraken has a tiered fee system that decreases fees the more you trade. For a smaller trader, however, this is not really plausible as it is based on monthly volume and getting to those lower fee tiers means significant funds wasted on fees to get to that point. Additionally, for a larger trader, it would be difficult to get your orders filled with the exchange’s lack of liquidity compared to the banned exchanges. Coinbase’s and Gemini’s fees are similar to Kraken’s.
The competitive fee rate for the listed banned exchanges is 0.025% for limit orders and 0.075% for market orders. That means $5 total in fees to complete a full trade round trip for limit orders, and $15 using market orders. Some exchanges, such as BitMEX for example, even pay traders a 0.025% rate for completing limit orders as it helps add liquidity to the order book. Other small fees also exist, such as funding rates, but these fees may or may not apply, depending on how long you hold a trade, and are comparatively small.
Liquidity also stands in the way. Liquidity essentially equates to the amount of any asset traded on an exchange in a given time period (often quoted in 24-hour time blocks). Liquidity makes it possible to easily get in and out of trades at the going market rate for any asset. Since the U.S. exchanges do not offer derivatives, it is difficult to compare volume numbers on paper, although taking a quick glance at the order books of U.S. spot trading exchanges versus derivatives on the banned exchanges shows a significant difference.
Then there is the issue of leverage. The three main U.S. exchanges do not offer more than 5x leverage, used for trading spot assets. The banned exchanges offer 100x on their derivatives. Trading with an account of $1,000 means you can theoretically trade bitcoin positions up to ten bitcoin, or $100,000 at any given time. You likely wouldn’t put all that capital into a single trade, but having that high leverage option means you can use your capital elsewhere, not needing to keep it tied up in one place.
These leverage amounts also limit risk of loss from hacking. If you have $10,000 for trading, but only need to put $1,000 on an exchange at any point, that means you can theoretically only lose $1,000 if a hack occurs, but can trade with risk management appropriate for more capital.
Not trading on these exchanges is frustrating. I am unsure if regulation is the cause for these differences, or whether exchanges are at fault. Regulation seems to be the root of the issues. While I do see need for regulation, I also see need for compromise and change. I am passionate about trading, but, as a U.S. citizen, I am giving up even the opportunity of trying different trading methods and strategies only possible with the banned exchanges.
Disclaimer: I actively trade cryptocurrencies, as well as hold a small amount of BTC, ETH, LTC, ZEC, BCH, LINK, and various insignificant other altcoin positions.