Leveraged trading is the biggest risk to the crypto market in terms of what could cause “something to pop down the line,” according to Joey Krug, Co-chief Investment Officer (CIO) at US-based major crypto investment company Pantera Capital.
He was speaking during Pantera Capital’s conference call yesterday.
According to Krug, some people get complacent when they realize crypto is here to stay. As a result, they lever up on it, thinking it can’t go down that much because institutions will swoop in and buy, saving the day. But eventually, when the lid blows off and bids are not there, liquidations of levered longs will drive the price down.
During the market crash on January 10-11, more than USD 3bn worth of long positions were liquidated, according to bybt.com data. To compare, on January 12, over USD 200m worth of short and also more than USD 200m long positions were liquidated.
As reported, crypto researcher and analyst Willy Woo argued that "unlike previous crashes in the past 2 years, where over-leveraged markets lead by trader liquidation, this one started on spot markets, then was greatly amplified by a single exchange partially failing, yet did not turn itself off for the good of the ecosystem."
Leveraged trading refers to borrowing funds so that you can take a larger position than you would be able to with your existing funds so that you can potentially generate a higher profit. However, while margin trading enables traders to amplify their returns, it can also lead to increased losses and liquidations, which is why experienced traders tend to advise newcomers to stay away from leveraged trading.
Meanwhile, during the call yesterday, Pantera Capital CEO Dan Morehead described the global macro environment as “off the charts,” pointing to the unprecedented pace at which the United States is printing money each month and “pushing it like crazy.”
As a result, the main two cryptoassets - bitcoin (BTC) and ethereum (ETH) - have soared, which illustrates the next point, which is that “this rally has consolidated around bitcoin and ethereum,” according to Pantera slides.
BTC’s and ETH’ share of the total market capitalization:
Krug also noted that institutional investors are primarily honing in on bitcoin and ethereum and outside of these two assets there is not a great deal of institutional interest.
Another huge development has been the rise of central bank digital currencies (CBDCs), a trend that has been led by China, which Morehead noted “has a very big headstart on the world.” And while they don’t directly impact the price of tokens that are not pegged to fiat money like stablecoins, they will still introduce “billions of people” to the market including those without bank accounts but with smartphones, Morehead said.
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Learn more:
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