LEVERAGE, IF NOT HANDLED CAREFULLY, CAN SPELL DISASTER FOR MARKET DUE TO ITS AMPLIFYING EFFECT ON RISKS. SO WHAT ARE ITS IMPACT⚠️❓❓❓❓
👉leveraging in the markets, particularly in the context of crypto like Bitcoin, can indeed lead to significant risks and cascading effects that impact market movements. Let's delve into how leverage operates and its potential.
👉Leverage allows traders to control positions larger than their initial capital by borrowing funds from exchanges or other sources. For instance, if you invest $100 with 10x leverage, it means you're essentially trading with $1,000. However, this magnified exposure comes with inherent risks.
👉When the market moves against leveraged positions, especially in volatile assets like cryptocurrencies, it can trigger liquidations. Liquidation occurs when the value of the asset backing the leveraged position falls to a level where the borrowed funds are at risk. In the scenario described, if the price drops by 10%, traders who entered long positions at various levels (e.g., $65k, $67.5k, $70k) would face liquidation.
👉During liquidation, exchanges automatically sell off the assets to cover the borrowed funds, compounding the selling pressure in the market. This phenomenon, known as cascading liquidations, amplifies downward price movements. As more leveraged positions are liquidated, it exacerbates the sell-off, potentially leading to rapid and severe declines in asset prices.
👉The risk of cascading liquidations is particularly pronounced when a significant number of traders enter the market with high leverage simultaneously. This dynamic can result in flash crashes, where prices plummet within minutes, causing substantial losses for leveraged traders and impacting overall market sentiment.
👉It's crucial to understand the implications of leverage and exercise caution when employing leveraged strategies, especially in volatile markets like crypto. While leverage can amplify gains, it also magnifies losses and increases exposure to market fluctuation.