Nithin Kamath Warns Crypto F&O May Trap Traders In Dabba Trading-Like Scam

Zerodha co-founder Nithin Kamath has taken to X to caution investors regarding crypto derivative exchanges. He posted that these platforms exist in a dangerous “regulatory limbo” that allows them to exploit ambiguity through perverse business incentives.

Kamath compared the situation to Schrödinger’s cat, "neither fully regulated nor unregulated." Kamath’s warning highlights a systemic flaw where the platform's profitability is directly tied to the client’s losses, distorting the trading ecosystem itself.

Kamath’s concerns focus not on the underlying cryptocurrency assets themselves, but on the futures & options (F&O), offered by these platforms. The first and most obvious risk, he noted, is the complete lack of recourse for traders if technical failures or financial misconduct occur on unregulated platforms.

The "other big problem" is the opaque nature of the counterparty, a flaw Kamath compared to illicit "dabba trading" or Contracts for Difference (CFDs).

In many instances, the platform itself acts as the counterparty to all trades. This creates a critical conflict of interest. "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," he said.

Kamath pointed out that these exchanges routinely offer leverage between 100x and 200x. Given the inherently volatile nature of cryptocurrencies, such high leverage guarantees that even a small adverse price movement is enough to completely wipe out a retail trader’s capital.

This creates a scenario where failure for the trader is "all but guaranteed," yet it benefits the platform by driving turnover and increasing the odds of client failure. Kamath called for the necessity of regulatory intervention, noting that the current lack of clarity on crypto derivatives is detrimental in the long run for all stakeholders.

The ongoing regulatory ambiguity creates a permissive environment for high-risk products and misaligned incentives, posing a significant threat to retail investors drawn into the crypto F&O market.