Leverage: A Market Catastrophe

I've warned numerous times: avoid leverage and steer clear of futures trading, as it will likely lead to financial losses. However, this time, I want to discuss the broader impact of leverage on cryptocurrency market movements. Understanding this is crucial.

First, let's break down how leverage works. Imagine opening a trade with $100 using 10x leverage, which makes it as though you're trading with $1,000. The exchange, like Binance, lends you $900. If the price drops by 10% (turning your $1,000 into $900), your position is automatically closed to prevent debt. This process is known as "liquidation."

When you're liquidated on a long position, your remaining $900 is instantly sold off to repay the exchange. Now, consider this phenomenon on a larger scale: imagine 10,000 people enter long positions with 10x leverage on BTC at levels like $65k, $67.5k, and $70k. If the price drops to $63k, these traders get liquidated, triggering massive market sell-offs. This chain reaction pushes BTC down further, causing more liquidations at $67.5k, and so on. This is known as cascading liquidations.

Excessive leverage in the market creates a risk of rapid, severe liquidations, potentially causing "flash crashes" where BTC can lose 20-25% in minutes. This can happen in traditional finance too, among banks and hedge funds, but that's another topic.

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