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The dangers of leveraging – just don’t do it

Greed is the root of all evil. No I am not talking about making money – everyone needs to make money in order to survive right? I mean there is no way that someone in the modern world can survive without a single cent. Even those hippies understand this simple fact. You need money. And there are plenty of ways to make money. I get mine from working a regular job – 9 to 5 office job. Yes it is kind of mundane and boring and you get to mix with all sorts of idiots in the office but it is a living. I don’t cheat people of money nor do I cause problems for society. But the most important is that I do need money. And when it comes to investing, I only invest in what I can afford to lose. Sure if it makes me a healthy return, good for me. If it drops like 50%, I usually wait it out till it becomes profitable for me to sell again. That is how I invest.

However if you have read articles on investments and stock market trading, you will surely have heard of “leveraging“. Basically it is an “investment strategy” that involves a trader “borrowing” funds from someone else and using it to do trading. A simple example would be someone in an stock exchange who wants to borrow 10 times the funds he has to do trading. So as to “amplify” the returns if he bets correctly. Yes if he bets and he wins, sure he will almost certainly make way more than what he would have if he just used only his original funds. This depends on how much “leverage” there is. But if he bets the wrong stock, there is a good chance of liquidation. This is because when someone leverages, he basically trades on behalf of the one who provides this “leverage”. And if the losses exceeds the original amount, then there is a chance of liquidation. This means that the position is closed out. So the trader gets nothing back because the losses exceeds the funds put in for the leverage. And for most cases in the centralized or even de-centralized crypto exchange, there is no way to do any real credit check. So in most cases, liquidation is the only option.

And just to show how common it is that traders get liquidated, here is an article on coinmarketcap on what happened recently. Over 82,000 positions got liquidated just on 17 July alone. And yes, there is one trade worth USD 4.86 million that got liquidated as well. Banks, institutions and exchanges are merciless machines and they will liquidate you without any hesitation. And how about in mid May when the crash started? Well this article by Coindesk shows that over USD8 billion was liquidated! When I first started trading I thought that people doing leveraging is very rare. But boy, I was so very wrong. Seems like a lot of retail investors do leveraging pretty often. I understand the desire to make money and I don’t think there is anything wrong with it. But sometimes too much greed can cause problems. And look at what happened when traders leverage – we get the huge swings especially to the downside aka major crypto market crashes. This will of course compound those traders who leverage even more.

So my advise to all retail traders is not to leverage. And only invest in what you can afford to lose. Don’t get swept away by all the FOMO and think that you can become a millionaire with that DOGECOIN Elon Musk seems to love so much. It is currently trading at USD 0.18 and its peak was at 0.72 just in May! Just imagine that massive losses that was incurred by investors!

By Admin

Someone who is very keen on small scale investments like crypto, mining and other investments. For the common folk!

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