Since 2020, over 90% of people entering the crypto space have done so because of the high leverage in derivative trading, fulfilling many people's 'get rich quick dream'. Perhaps the character 'Liangxi' from Henan reflects the reality of these people when they entered the crypto space. Archimedes said: 'Give me a lever, and I can move the Earth!' This is the greatness and charm of leverage.
After being deeply educated by contracts and leverage, I continuously reflect, which has allowed me to survive in this market for so long. Today, I want to share the principles and operational risks of derivative trading with everyone.
What are contracts, leverage, and staking loans?
Contract: Contract trading is a type of derivative trading, developed in the crypto space based on traditional futures, a standardized product based on digital currencies, covering pricing and trading subjects. Unlike traditional futures, they are divided into time contracts with a delivery date and perpetual contracts without a delivery date. Time contracts are settled at the agreed expiration date, while perpetual contracts have no expiration or settlement date, similar to a margin spot market that can leverage its functions.
Leverage: Leveraged trading refers to using a small amount of initial capital to gain a larger position exposure, involving the use of borrowed funds to trade cryptocurrencies, indices, commodities, and currencies (foreign exchange) and other financial assets.
Leveraged trading can amplify your ability to buy or sell, allowing your trading capital to exceed the funds currently in your wallet. You can borrow up to 100 times your account balance, depending on the trading platform you use.
Staking loans: The operation principle of cryptocurrency lending is that a user provides their cryptocurrency to another user and charges a certain fee. The exact way of managing the loans varies by platform. Users can find cryptocurrency lending services on centralized and decentralized platforms, with the core principle remaining unchanged.
Users don't necessarily have to be the borrowers; they can also lock their cryptocurrencies in a liquidity pool, allowing the pool to manage funds to earn passive income and interest. Choosing highly reliable smart contracts usually means the risk of personal capital loss is minimal.
Which of the three trading methods: contracts, spot leverage, and staking loans has the highest cost-effectiveness?
Principal: 1000 USD, leverage multiple is 2x, underlying asset: ETH,
Opening price: 1000 USDT, closing price: 2000 USDT.
Contract trading: — Perpetual contracts [USDT-denominated contracts]
Spot leveraged trading is equivalent to coin-denominated contracts.
Let me explain: why is it 2x leverage? The liquidation price is: 670. 2x spot leverage and 2x coin-denominated contracts are essentially 3x because your margin is based on the pegged token, not USDT. USDT is a stablecoin, while the price of your token can fluctuate!
Staking loan operations:
This mathematical problem, I will write it out directly: principal 1000 USDT, ETH price 1000 USD, at this time I can buy 1 ETH directly, and then stake it on the exchange, borrowing 500 USDT. [Does this operation mean that if the ETH price falls below around 500, I will face liquidation?]
So the 500 USDT borrowed can be used to buy 0.5 ETH, and then stake again to reduce my risk of forced liquidation.
So which of these three types of trading has the highest cost-effectiveness?
Comparing this way, purely from the perspective of returns and risks, they are roughly the same, or can be said to be basically the same, with not much difference. However, what truly decides your success or failure is often the details of trading and studying the rules of the trading platform.
First, USDT-denominated contracts are the easiest to understand, the easiest to operate, and the most cost-effective. Similarly, USDT-denominated contracts, in extreme cases, can be made in such a way that they won't get liquidated, provided that the margin is increased sufficiently.
Second, coin-denominated contracts and spot leveraged trading, before the Luna incident, had the best cost-effectiveness, but in this bull market, this trading has relatively low cost-effectiveness because the biggest risk of this trading is: when you are making profits, it is calculated based on gold standards, but when you are losing, it is calculated based on coin standards.
In other words: your profits can be calculated, but if your leveraged trading on a certain token experiences a price crash like Luna, continuously dropping, your coin-denominated contracts and spot leveraged trading have no bottom. Even if you increase your margin significantly, you can still be liquidated because the price of the coin you are pegged to keeps falling. To balance, you can only increase your coin-denominated amount, so in extreme cases, if the coin price keeps falling, you can only increase your coin-denominated amount indefinitely to avoid liquidation. Look carefully at the image below, and you'll understand why.
Third, staking loans are a method commonly used by institutions and many capital in the space. In essence, it is the same as contracts, with similar risks. The biggest advantage of this operation is: I use token A to stake and loan USDT, then buy token B, which appreciates more, earning more.
Some people may not yet understand the calculations above. If you still don't understand, you can scan the QR code at the end of the article to add me on WeChat, and I will teach you.
So how should we better execute trades?
1. Strategy and discipline.
To make money, you first need to have your own method, and secondly, you need disciplined execution. Having your own stable profit model means you need to trade according to your plan and execute your strategies and techniques. In fact, what matters is not how many techniques you have, but having one skill that lets you thrive!
2. Mindset and execution.
A truth about the crypto space is: Many people think it is difficult to make big money this round, believing it is because their principal is small. If they had an eight-figure asset, they would buy BTC and hold it. However, this thinking is wrong; it is just an excuse. What you need is a stable profit model that you can continuously replicate to compound your returns.
But why can't most people do it? They feel their principal is small, so they frequently engage in short-term operations, attempting to compound in a short period, resulting in frequent losses or being stuck, making small profits and large losses, and their principal keeps decreasing. Or they are eager for quick success, opening high-leverage contracts recklessly, fantasizing about getting rich overnight; the consequence is getting heavily in debt overnight.
3. Pay more for learning.
Many truly valuable things, very few people are willing to teach you for free. Other people's labor and skills handed to you for free often won't teach you the real stuff. The key point is: learning can help you protect your wealth well and enrich your skills, allowing you to go further in the crypto space!
Finally: Many viewpoints in this article represent my personal understanding and judgment of the market and do not constitute investment advice for you. If you have different opinions, feel free to communicate.
