🚫 ATTENTION PLEASE 🚫
If you trade in the Futures, then read this.
LEVERAGE IS THE NAME OF ONE BIG DISASTER IN THE MARKET
I have mentioned it many times "Don't try futures, and don't use leverage if you're new to crypto. Even if you've spent 3-4 years in this sphere, please don't." But this is not what I'm going to talk about now. This time I'm going to explain the impact of leverage on the movements in the crypto market. So pay attention because this is important.
Firstly let's understand how leverage works.
Suppose you opened a trade to buy with $500 with 10X leverage, it will act as if you had $5000 in your account. So, how does this work? The exchanges (here Binance) will simply lend you $4500 and in exchange for that, if the price drops by 10% (your $5000 will turn into $4500), then your position is automatically closed to prevent you from being indebted towards the exchange. You are what is called "liquidated".
When you get liquidated in a long position, at the moment of your liquidation, it instantly creates a market sell off: it means that your remaining $4500 is sold so that Binance can recover it's money.
Now let's take this phenomena and apply it on a much larger scale. Imagine that 100000 traders enter long with 10X leverage on ETH at 3 different levels : at $2.8K, $3K & $3.2K. Let's imagine the price drops to $2.7K, a -10% from $3K. Here the traders who entered will get liquidated & thus trigger massive sell orders in the market which will strongly push down the price of ETH and could further go down to $2.5K due to massive liquidations which will trigger the liquidations of those who entered at $2.8K and so on...This is known as cascading liquidations.
When too many people open positions with leverage, it creates a risk of very strong and rapid liquidations, which can create "FLASH CRASHES", that is, moments of a few minutes where ETH can go down 15-20%. This works the same in traditional finance, on the scale of banks/ hedge funds and so on... But I'm not here to lecture on that.
Hope you'll learn from me 💚
