đđ„ LEVERAGE: A DOUBLE-EDGED SWORD! đ„đ
Understanding leverage is paramount. Picture this: you initiate a $100 trade with 10x leverage, effectively wielding $1,000 in buying power. Here's the catch: the exchange fronts you the remaining $900, but if the asset's price dips by 10%, your position is automatically liquidated to prevent debt accumulation. Enter the dreaded scenario of being "liquidated."
When a long position faces liquidation, it triggers an immediate market sell-off. Picture thousands of such liquidations transpiring simultaneously due to a price downturn. This flood of forced sales cascades through the market, driving BTC prices southward. Imagine individuals entering long positions at $65k, $67.5k, and $70k â as the price plunges to $63k, triggering liquidations, it sets off a domino effect. The subsequent plunge to $60,750 triggers further liquidations, intensifying the downward spiral. This phenomenon, aptly termed cascading liquidations, underscores the peril of excessive leverage.
Excessive leverage introduces a potent risk factor, paving the way for swift and severe market corrections. Flash crashes become a looming threat, with BTC plummeting by -20% or even -25% within minutes. This phenomenon mirrors traditional finance's vulnerabilities, albeit on a grander scale involving banks and hedge funds.
In essence, while leverage promises amplified gains, it equally amplifies market volatility and downside risks. As traders navigate these treacherous waters, caution is paramount. The allure of quick profits must be tempered with a prudent approach, steering clear of excessive leverage to shield against catastrophic losses.
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