Risk of Leverage
: we have to handle it wisely
We are exposed to leverage in many circumstances.
In addition to the leverage of the Futures or Margin trades at CEX(Central EXchange), there are also the margin trades of the stock market, and the bank’s loan, which is the most famous-friendly leverage product.
Of course, you can’t loan from most banks with as much leverage as you think because they have strict credit ratings.
However, trading at CEX, leverage can be generated more easily than expected. In particular, we are exposed to tremendous leverage because they support about 100x — 125x in future trades.
Therefore, we Cryptorians, especially those who frequently trade futures/margins, should be aware of the risks of leverage.
Smart use of leverage maximizes profits, but if not, you will lose more than expected and lose the power to make a comeback.
The writer also remembers suffering from the wrong use of leverage in numerous trades.
As everyone does, there is a certain section, and at that moment, there are times when you take a position that you can’t handle(overleveraged).
It should be especially important to note that losses in this interval increase by the size of an unaffordable position.
If you’ve actually traded futures at CEX, most of you would know, but assuming you’re using 5x leverage, instead of a 20% fall/rise, your position will be liquidated at 1n.n%.
If you are unfamiliar with futures trading, you should be aware that the presence of a Margin Ratio may result in liquidation sooner than you expect, so that you can start the trade with recognition of this.
The larger the leverage, the higher the Margin Ratio, and the faster the liquidation pressure.
Leverage ETF, one of the leverage products rather than just leverage in futures, is more complex.
For example, if you invested ‘3x ETF Long’ and the macroeconomic situation is as bad as it is now, you may suffer a painful loss due to “Negative Compound Interest” as you can see in the image.
“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.” from Robert Kiyosaki, the author of ‘Rich Dad Poor Dad’
We need to deal with these liabilities, or leverage, wisely.
Sometimes using leverage wisely can help us.
For example, if you use leverage well, you can maximize the effect, especially when you receive an ‘airdrop’ in Crypto.
Most famous way to make money in the crypto scene.
If you take advantage of the leverage that you can afford and actively use methods such as futures short/spot buy, you can get the most profit within your operating assets. Also, if you expand your eyes to real estate, many people use leverage, or loans, when doing real estate trades.
If leverage is used when trading real estate in conjunction with the right timing of interest rates, leverage can be used wisely.
As above, it is very difficult to use leverage wisely.
The results come after everything is over, and it is difficult to know whether this judgment is the right judgment or whether all variables have been removed at the time of leverage.
In addition, if you use leverage emotionally by ‘FOMO’ or ‘FUD’, for example, when all assets rise, you can make leverage at the end of the momentum, or if you make a short bet with leverage at the end of all FUDs gone, your assets can quickly disappear.
In such a situation, we can see a lot of news and documentaries where people can’t control their emotions, lose all their remaining assets, and even go into bank debt.
Using leverage maximizes profits, but losses can also be unexpectedly maximized.
If we make it a habit to think once more and act before we always generate leverage, whether this judgment is the right judgment or not, we can use leverage wisely.
Disclaimer
The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. PURSE does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.
