Chris Curl,
Editor
Dec. 9, 2021
One would think that investing in a highly volatile asset that often grants 10x gains in a short time frame would be exciting enough for most people.
Sadly, that is not the case. This was evidenced quite starkly last week when bitcoin suffered a catastrophic ‘cascade of liquidations’.
Q4 is historically bullish both for equities and the cryptocurrency market. Many investors felt confident that bitcoin would hit 6 figures leading up to 2022. Some were so confident that they opened leveraged long positions — a lot of them. Over $2 billion in long positions, $850 million of which were from bitcoin futures, were hanging in the balance as of last Friday morning.
The stock market was struggling from a trifecta of concerns over a new Covid variant, weak jobs data, and future Fed tapering. The fact is that bitcoin is intimately connected with the performance of the stock market. If the latter crashes, the former will likely follow suit. People speculate in the crypto space when they are confident in the bullishness of the overall market. When things get dicey, they pull their money out of crypto and cash out their gains.
On Friday morning, bitcoin stood at $57,000. By that evening it had plummeted as low as $42,000. Market makers and bitcoin whales completely liquidated all of those leveraged long positions. Welcome to crypto.
Leveraged trading crypto is a terrible idea. Too much bitcoin is under the control of groups with large amounts of capital. They can easily spot whether there is too much leveraging in either direction and take action. This makes it possible for these entities to manipulate the markets and create enormous profits for themselves at the expense of everyone else. It’s just too risky for the little guys to play that game.
I know that greed is a powerful emotion but it must be tempered by data. Had investors not been greedy in taking out these leveraged long positions, the crypto market would not have seen such a massive swing to the downside and many gray hairs would have been avoided.
Sensible, long-term investment strategies win out over the short-term gambling mindset of leverage trading. This event stood as a stark reminder of the dangers of leveraged trading and the inherent risks of crypto investing in general.
I always stress that people shouldn’t invest money they can’t afford to lose in crypto. It’s just too volatile. But that volatility is the key to the enormous gains that can be had in a short period of time.
Bitcoin has rebounded somewhat and is currently trading near $50,000. The Omicron panic appears to have mostly subsided for now and the stock market is recovering. I’m still bullish on bitcoin as long as the stock market doesn’t crumble. In fact, this is likely a good entry point for people getting into crypto for the first time.
If bitcoin can regain its previous support at $53k then I think we’re off to the races.
Keep showing up,
Chris Curl
Editor, Crypto Cycle