This week we saw over 10 billion in liquidations off of exchanges. Frothy. While the market is already on the mend, these liquidations show the reckless actions of traders. In a market that has exponentially risen this year, some traders have lost everything. These liquidations were a result of over-leveraged positioning and margin trading. Learning from mistakes in this sector can be extremely costly as few regulations protect uninformed investors. The purpose of these educational pieces is to help protect you, and with that in mind, we will discuss risks and proper usage of leverage.
Leverage uses borrowed assets to amplify a trade and is denoted in a ratio of 10:1 or ten times your capital. Typically in the USA, there are account requirements for margin trading as well as day trading. For day trading, the SEC requires $25,000 per account minimum and allows 4:1 margin trading. That means that if you are leveraging 4,000 USD, you will need to provide 1,000 USD in capital while the exchange offers the other 3,000 USD for a fee.
Understanding the fees charged for margin trading, usually called funding rate, is essential as it accrues at each expiry of the trading contract, which could be every 8 hours. With cryptocurrency, most users access these margin services through Binance and several other popular businesses. Still, most operate in a legal grey area. They offer services up to 120x leverage, which can be a boon or burden, but either way, it increases your risk substantially.
The popular margin trading platform Bitmex had its founder, Arthur Hayes, extradited to the US regarding allowing US customers to trade on their platform. Most of these platforms do not fully explain the risks of margin and make it extremely easy to access these features without any requirements. Binance has also come under scrutiny from the CFTC (Commodity Futures Trading Commission) due to unregulated futures and margin offerings. Another issue is in periods of market turbulence; these exchanges have had outages, preventing traders from monitoring the trades.
With all these risks described, statistics show that nearly 40% of all day traders day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. The long-term sustainability of these endeavors is challenging to manage, and profiting traders are in the minuscule minority. I encourage prospective futures traders to evaluate all these factors and continue to dollar cost average your entry points in spot markets.
If these risks do not deter you, I recommend using paper-trading for a few months to assess your capabilities. Kraken allows margin trading up to 5x, which is more than enough leverage, but it is a centralized exchange. My favorite decentralized platform is Injective Protocol. They are currently in beta testing and allow paper trading on the exchange. The eventual goal is to create a decentralized margin platform without downtime. With the launch of the platform scheduled for Q2 this year, traders will utilize a more evenhanded protocol, resilient to centralized manipulation.
Markets are quickly recovering after the fall last week. Here are some of the important stories from the past few days.
European Investment Bank Issues $121M Digital Notes Using Ethereum
On 27 April 2021, the EIB launched a digital bond issuance on a blockchain platform, deploying this distributed ledger technology for the registration and settlement of digital bonds, in collaboration with Goldman Sachs, Santander and Societe Generale.
In a partnership with Banque de France, the payment of the issue monies from the underwriters to the EIB has been represented on the blockchain in the form of CBDC.
The EIB believes that the digitalisation of capital markets may bring benefits to market participants in the coming years, including a reduction of intermediaries and fixed costs, better market transparency through an increased capacity to see trading flows and identity asset owners, as well as a much faster settlement speed. Read more.
Inflation Worry Spreads Beyond Bitcoiners to Wall Street Stock Analysts
The inflation scare looks to be spreading to stock markets from the bond and bitcoin (BTC, +1.58%) markets. Suddenly, it’s a top-of-the-mind concern for Wall Street analysts peppering CEOs with questions during quarterly earnings conference calls.
According to a new report from Bank of America, the second-biggest U.S. bank, the number of mentions of “inflation” in earnings calls of Standard & Poor’s 500 companies has more than tripled year on year, the most significant jump in 17 years. The bank published the note Monday, according to MarketWatch.
Strategists cited raw materials, transportation and labor as major potential drivers of inflation, adding that the number of mentions of inflation has historically led the consumer price index (CPI) by a quarter, with a 52% correlation. As per Bloomberg, several companies have begun passing on higher costs to consumers. Read more.
Why Bitcoin’s December Price Target Is Now ‘Above $300,000’ - Ep.228
In an interview moderated at Real Vision’s “Crypto Gathering,” Peter L Brandt, veteran trader and publisher of the Factor Report, and Willy Woo, prominent on-chain Bitcoin analyst and author of the “The Bitcoin Forecast,” a market intelligence newsletter, discuss Bitcoin charts, trading, and how Bitcoin is evolving as an asset. They cover:
why Peter believes that, with Bitcoin, we are watching history in the making and what a “parabolic advance” has to do with that belief (2:02)
the differences in trading Bitcoin, which trades 24/7/365, in comparison to a normal asset -- like a stock or commodity (6:36 )
Willy’s price target for the top of this bull run (8:37)
why Willy thinks there is a Bitcoin supply shock (12:12)
the reason Peter does not think Bitcoin is a bubble (15:09)
why Willy believes we are witnessing the birth of a new monetary system (17:23)
the state of Bitcoin adoption and how fast adoption will grow (21:24)
Peter’s crypto journey and why he measures wealth in Bitcoin instead of dollars (27:02 )
why Peter thinks we are prisoners of war to the fiat system and how Bitcoin fixes this (31:33)
what sort of volatility both Peter and Willy expect going forward from Bitcoin (33:43)
how Peter feels about the laser eyes trend on Crypto Twitter (39:35)
tips for aspiring chartists and traders (41:33)
That’s all for the free weekly Crypto Crier. If you enjoyed this article please like and share. If you have any questions, please leave a comment and I can answer your questions further. As with all of my writing, this is not financial advice and is my opinion. I cannot stress enough how important it is to do your own research on all financial endeavors. I hope that these newsletters can help investors realize the current financial systems’ downfalls and usher in a more equitable system without middlemen.
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