Crypto market turmoil highlights risks of leverage in trading
Crypto Market
Modified Date:- Published Date:-Categories: Cryptocurrency
Crypto marketturmoil highlights risks of leverage in trading
Leveragedtrading of cryptocurrencies i.e., trading crypto with borrowed funds comes withsignificant risks. This is mainly due to the capricious nature of the market.
In May, thecryptocurrency market, which had grown significantly over the past couple ofyears, recoiled violently following a cascade of negative market events, losingover 50% of its market cap. The pullback, which caused a jarring $2trillion market wipeout, also exposed some of the market’s biggest weaknesses.One of them was the reckless use of leverage in a market that is historicallymercurial.
This aspectwas recently affirmed by billionaire investor Mike Novogratz. Novogratz, afierce crusader for the industry at large and a once-ardent supporter of theTerra ecosystem before its downfall.
Whatis leverage?
Leveragerefers to the use of borrowed capital to trade, and is usually the preserve ofprofessional traders with significant experience in risk management.
To tradeleveraged products, investors are usually required to make a minimum depositwith a broker that supports this type of trading. Platforms that support margintrading effectively lend money to investors for the purpose of opening biggerpositions.
Notsurprisingly, leveraged trading in crypto leads to a lot of liquidations due tothe unsteady nature of the market. According to data derived from Coinglass,a crypto data analytics and futures trading platform, the crypto marketexperiences hundreds of millions of dollars in liquidations every week.
According tothe CEO, many crypto traders have poor risk management skills, especially whenit comes to limiting losses. He stated that crypto investment risks shouldideally never exceed 15% of one’s portfolio. Of course, this rule is rarelyadhered to, hence the perpetual liquidations.
The cryptocurrency market is capricious, and can change dramatically in a short time period. Liquidity of the markets is limited, and due to this, leverage has been steadily increasing over time. This has led to a lot of negative impacts on the entire ecosystem including traders losing all their money and others seeing their values decline in no time at all.