Crypto market turmoil highlights risks of leverage in trading
Leveraged trading of cryptocurrencies — i.e., trading crypto with borrowed funds — comes with significant risks. This is mainly due to the capricious nature of the market.
In May, the cryptocurrency market, which had grown significantly over the past couple of years, recoiled violently following a cascade of negative market events, losing over 50% of its market cap. The pullback, which caused a jarring $2 trillion market wipeout, also exposed some of the market’s biggest weaknesses. One of them was the reckless use of leverage in a market that is historically mercurial.
This aspect was recently affirmed by billionaire investor Mike Novogratz. Novogratz, a fierce crusader for the industry at large and a once-ardent supporter of the Terra ecosystem before its downfall.
He recently acknowledged that he underestimated the amount of leverage in the market and the losses that this would bring.
"I didn't realize the magnitude of leverage in the system. What I don't think people expected was the magnitude of losses that would show up in professional institutions' balance sheets, and that caused the daisy chain of effects," he said.
Speaking to Cointelegraph earlier this week, KoinBasket Founder and CEO Khaleelulla Baig, reinforced the view that the market was indeed overleveraged and will take a while to recover:
He added that regulators were likely to look into the leverage loophole in order to protect investors, stating, “Albeit these events have opened doors for regulators and industry participants to build robust mechanisms to avoid such catastrophes in the future.”
Leverage refers to the use of borrowed capital to trade, and is usually the preserve of professional traders with significant experience in risk management.
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