Here’s a Good Reminder to Not Use Leverage When Investing in Cryptocurrencies

On December 4, the popular cryptocurrency Bitcoin (CRYPTO: BTC) It fell thousands of dollars in a matter of hours – an event referred to as a flash crash. Other popular cryptocurrencies like Ethereum (CRYPTO: ETH)And Solana (CRYPTO: SOL), And Cardano (CRYPTO: NO) It also fell sharply during this time. While there was likely to be a variety of factors that led to the rapid crash, many of them were driven by investors who were forced to liquidate their investments because they were using leverage.

Goofy analyst Eric Bleecker brought up this topic recently Motley Fool Backstage Pass. In this video, Registered on December 8thEric spoke to Bernd Schmid, Principal Advisor to Motley Fool’s Digital Explorers Crypto Service. Bernd reminds viewers that there is no need to use leverage especially with investments like cryptocurrencies that have historically performed well.

Eric Blaker: So we see Bitcoin now, as of this morning, at $49,000. Ethereum is priced at just under $4,300. Solana, $186. Cardano at $1.36, which is a small sale on Cardano. Overall, the cryptocurrency market has a volume of $2.3 trillion, which is about 24% of its value, or should I say 24% of its 52-week high.

Now, I think we want to talk, the benefit is how the majority of the sell-off occurred, which was in a very short period of time on Saturday night, and some of the factors that caused recurring cryptocurrency sell-offs—large amounts in varying lengths of time. So Bernd, what do you look at when you see him like this? Specifically, I am referring to leverage.

Bernd Schmid: It’s only natural that the cryptocurrency markets see something like this every now and then. It would be crazy for something like this to happen in the stock markets. There are actually, I don’t know the exact rules but there are some, remind me what is the name of this, but there are some stock trading rules like that the stock market will stop for some time if a correction of more than 10% occurs in a very short time. something like that.

Bleecker: Yes, I guess it’s called like “trips,” right?

Schmid: I have no idea. But yeah, anyway, that’s just to keep the market from really going crazy and crashing and losing control. This is not what is happening in Bitcoin and in the blockchain or crypto markets. Control will not be lost. There will be crazy things going on like this. Also, what happened here specifically if you look at the numbers I’m not an expert on this but if you follow the look of others and the data out there it’s very transparent. Especially the drop you see which is actually going deeper, I’m not sure about that, I think you have here. If you look at the other exchanges, it even went down very close to $40,000, only to go back up to $48,000 in a matter of, I don’t know if it was a minute or an hour or two, a very short time frame. It was very clear that the bulk and also 80%, maybe 100% of this huge sharp correction was just pure liquidation of the leveraged positions. People trying to play with leverage, I don’t know, if bitcoin goes up by 10%, they will win 100%. But if the bitcoin price drops to 10%, as such, they will be essentially wiped out, forced to liquidate their position, and the collateral they are posting. Then a string is generated. This liquidation creates another downside move which is smaller than the next liquidation I believe. You have a chute down so everyone is filtered out in the extreme case. Suddenly, you have all those people who wake up in the morning and suddenly find that they lost their Bitcoin position and Bitcoin is up 10% versus when they were forced to sell it. This is a very unfortunate situation.

For some reason, people like to play with leverage as if that’s something you need in a market that is going up 100%, 200% per year on average, historically. But yes. This played a big role in this case. There are certainly other things as well, in general, if the stock market is in a downtrend or panic fear mode, you can call the no-risk mode and then similar things happen in the crypto markets as well. On the shorter time horizons, there is a significant correlation between the two in the long run, not really or much less, at least. But in the short term because the stock market in general there is a fear of inflation, people are getting out of stocks, they are out of risk, they want to go to safe havens like bonds. Not sure if that’s what happened, and where the money ultimately went. But the same with encryption as well. They take money. Some institutional players or big players are just going to take their money, maybe that was the explanation for the initial move from $57,000 to $52,000 or something like that. Then all of a sudden this series of long leveraged liquidations is what started and we’re in the recovery phase. I’m not worried about this. It’s just a reminder to me always, don’t play with leverage.

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