When referring to buying and selling cryptocurrency, many individuals will suggest using a leverage strategy – using the power of money (or the promise of more money) to acquire buying opportunities. While there is nothing inherently wrong with leveraging, suggesting that someone should use leverage to buy something as complex and esoteric as cryptocurrency simply because it is “popular” or “trendy” can be a slippery slope to financial peril.
Betting And The Law
To understand why using leverage to purchase cryptocurrency is a bad idea, it is important to understand how the laws apply when it comes to trading and investing in financial instruments.
In traditional finance, investors will often borrow money to invest in a trading opportunity. This is known as leveraged trading and, as the name would suggest, is typically done using a leverage ratio of at least 2:1. When leveraged, the potential for large losses is greatly amplified – which is why it is usually avoided by institutional investors and high-net-worth individuals, amongst others.
When purchasing cryptocurrencies with the use of leverage, the same principles apply. However, since cryptocurrencies are extremely volatile, it is almost always safe to assume that a leveraged purchase is a very risky proposition. The fact that the price can quickly rise and fall by a thousands of percent in a matter of minutes makes cryptocurrencies highly illiquid. This makes it extremely difficult for investors to exit a position, whatever the reasons for placing it (it is also why many exchanges limit the amount of cryptocurrencies that can be deposited at any given time).
Why Are Derivatives and Long/Short Sales Important To Know About?
Those who have followed the cryptocurrency market for a while will know that prices can rise and fall sharply, sometimes by dozens, even hundreds of percent in a short space of time. While this is usually the result of some sort of dramatic news event, it can also be a case of a small number of investors gaining or losing interest in a particular cryptocurrency and causing a domino effect. As it is extremely difficult to close out a cryptocurrency position once it is opened, those who use leverage to purchase cryptocurrencies are likely to find themselves in the uncomfortable position of having to risk more than they can afford to lose, especially if the price drops after they have borrowed the funds to purchase the asset.
Hedge funds and similar instruments are used by professional investors to access the markets when they want to take a short position – in other words, when they believe that a particular price will drop. Using these sophisticated tools allows investors to perfectly hedge their risks – taking a position in the same market as a competitor but without having to worry about the position going against them. In a nutshell, long/short sales allow professional investors to access the markets when they want to take a short position – but without risking more than they can afford to lose.
The Risks Of Leveraging
The risks involved in leveraging are many and varied, but they mostly stem from the fact that you have taken on extra credit – either through the use of credit cards or other forms of lender credit. When credit is extended to a business or individual, the risk of non-payment goes up. Since most lenders are wary of lending more than they have to, the risks of non-payment and extra credit usage are usually grouped under the umbrella of “default risk”.
There is also the possibility that prices will decline, giving the investor a loss – as was the case with the recent drop in the value of the Bitcoin (and other cryptocurrencies). When prices decline, it is often because there are fewer buyers than sellers and the demand is lower than the supply. One of the main reasons why cryptocurrency prices decline is because there are always people who want to sell their coins at the same time as there are people who want to buy them – the only way for prices to stay consistently high is for an equilibrium to be reached between the amount of buyers and sellers. When this happens, the price will be pinned to the level at which there is usually demand and supply – the floor. This is known as a “floor” – meaning that even though the price may fluctuate up and down, it will generally not deviate too far from the floor.
When prices drop, this is often due to fear about the future of the cryptocurrency market – as was the case with the recent drop in the value of the Bitcoin. Many people had bought into the trend of cryptocurrency thanks to the widespread adoption of bitcoin and similar digital currencies. As more and more people got on board, the market value went through the roof. After the price peaked at around $20,000 per unit, it started a steady decline as people lost confidence in the future of cryptocurrency. Since then, the price of most cryptocurrencies has dropped significantly.
Even when prices go up, it does not always mean that all your investments will gain in value. For instance, when the Bitcoin price reached $20,000 per unit, it became extremely attractive to speculators looking to make a quick buck. Since then, those who had used bitcoin as an investment had to make serious money to recoup their original investment – which is why most cryptocurrency holders use the funds they have invested in cryptocurrency to pay for basic necessities such as rent and food. As with any other investment, there is the risk of loss – which is why it is always advisable to put your savings in a safe place (like a bank or a brokerage account) and not invest money you cannot afford to lose. Finally, there is the extra credit card debt that you may incur from buying cryptocurrencies using credit cards.
Is There Any Way To Safely Leverage?
Yes, there is a way to leverage cryptocurrency safely, and that is through the use of derivatives. A derivative is a financial instrument that derives its value from the price of something else – in this case, the price of Bitcoin or some other cryptocurrency. The main benefit of a derivative is that it allows an investor to take on small amounts of risk, while still enjoying the benefits of leverage (and the associated high profits that can be made in a short space of time).
A look at the popular bitcoin derivative, the futures contract, will give you a good idea of what I mean. Unlike traditional equity certificates or stock options, which usually only give the holder the right to purchase shares in a company at a fixed price at some point in the future, futures contracts give the holder the right to purchase an asset (in this case, cryptocurrency) at the current price – currently, the price of bitcoin is $15,250 and the contract expires in 10 days.
This makes cryptocurrency derivatives a very attractive option for those who want to get in on the action – without having to spend a large amount of money up front. If you are already using a leveraged strategy to play in the crypto markets, consider how much easier it would be to just place a small bet using a derivative instead of having to liquidate your entire position – especially if the price turns out to be unexpectedly low after you have placed a large order at a cryptocurrency shop.
While there are many risks associated with leveraging cryptocurrency, it is still a popular way to get into the market. It should not be mistaken for a good investment strategy, and those who decide to go down this road should be fully aware of the inherent risks. Ultimately, it is always safer to spend money you have saved rather than using credit cards to make an investment – especially if you are not experienced in financial matters. In cases where you feel that you have been misled, you should speak to a reputable legal firm who can advise you on how to proceed. A good place to start would be the Better Business Bureau – you should be wary of any company that claims to be able to help you make money quickly and easily without you having to learn anything – especially if they offer “get rich quick” schemes.