Overleveraged - The Daily Gwei #501
Don't blow yourself up.
Fear and greed pretty much rule every market on the planet and it’s a major reason why we tend to see boom and busts play out similarly across financial markets. There’s an eternal debate over which is more powerful - fear or greed - and I’m of the opinion that they can both be as powerful as eachother though just in different contexts.
Over the last few months we have seen this crypto bear market humble so many people who people thought were invincible. Terra and Do Kwon (and all the funds/people involved with Terra), Celsius, Three Arrows Capital and more. This is typically what we see when the easy money stops flowing and markets come crashing down - there’s actually a saying on this from Warren Buffet himself: “only when the tide goes out do you discover who's been swimming naked.” Translated for crypto, this means that only when everything stops ‘mooning’ do you discover who was actually a good investor and who was just lucky.
Leverage plays a major part in all of these blowups and really the use of leverage stems mostly from greed. Leverage also tends to daisy-chain between lenders and can cause a really big cascading effect in a downturn because of all the distributed risk. It gets especially bad when there’s a “liquidity crunch” where people/funds that are on leverage need to pay down their debts by selling volatile assets (which are falling in price as they try to sell them). This is pretty much what we’ve been seeing over the last few weeks and a major reason why the prices of BTC and ETH have gone down more than most people expected.
This is all why I always warn people against using leverage - in my eyes, it’s just not worth it. One of the worst things that can happen to you in investing is blowing yourself up and being out of a position - especially as the market is going up. I actually had some friends blow themselves up in early 2020 by using leverage after holding on for the entire bear market - it was brutal to watch them cope with this loss and some were never the same again.
Of course, none of this is unique to crypto, it’s happened in the non-crypto markets plenty of times because the common denominator is humans and humans are always greedy (and fearful). What matters is how we bounce back from this and how long that takes - it could be months or it could be years but nothing has fundamentally changed about the technology - short term speculation just got way out of hand and now we all have to pay the price for that.
Have a great day everyone,
Anthony Sassano
Enjoyed today’s piece? I send out a fresh one every week day - be sure to subscribe to receive it in your inbox!
Join the Daily Gwei Ecosystem
All information presented above is for educational purposes only and should not be taken as investment advice.
Thanks for sharing your thoughts, only us human emotions make markets fluctuate