Liquidation Weekend
Happy Monday!
We live in interesting macroeconomic times. In fact “interesting” may not do this justice, a better word would be “unprecedented”.
Interest rates are at historic lows, inflation is at historic highs. Asset markets everywhere, including stocks, real-estate, and crypto, are sitting at record highs. Is all of this cause for concern? Perhaps.
Market skeptics have been warning about these factors for years now. You can dig up all sorts of old articles that warn investors against impending doom, and urge them to get out before it’s too late. Most of the time, of course, these warnings are wrong. The markets go on to new highs and leave those who heed the warnings on the sidelines. Timing the market is hard, nobody rings a bell at the top.
Worse still, as the market accelerates on it’s march upward, so to do the feelings of FOMO. This happens to such a degree, that even those that are already “all-in” fear missing out! That’s when people start to take on leverage… This is unfortunately where the line between investing and gambling begins to blur.
The problem with leverage is, it makes it harder to hold onto your investments. When you are “investing” with money you don’t actually have, you are at the mercy of the lender. They have your collateral. When the price of this collateral reaches a certain point where the lender has too much risk, they liquidate the position (sell your collateral), leaving you with nothing.
This may sound crazy, but it has been a persistent force in financial markets for centuries. And perhaps never moreso than today. Technology has made using leverage easier and more accessible to anyone. Crypto has played a big role in this as well. Platforms like Celsius make low-interest loans available to anyone with the necessary crypto collateral. However, these loans max out at 50% leverage, not too extreme. On the novel platform Abracadabra, users can choose from a wide range of collaterals, from stablecoins to highly volatile crypto project tokens, and can take on leverage up to 900%+ (or as low as they please!).
Still other platforms, such as Binance, “offer” their users up to 10,000% leverage… This is akin to buying a $10,000 car with only $100 in capital. That story doesn’t end well. It does result in more liquidation fees for the exchange though.
Unfortunately, this weekend brought just such an unhappy ending to many overleveraged market participants. The crash on Friday night was the largest liquidation event since May (which I wrote about at the time).
As you can see from the metrics above… over $2.5 Billion was liquidated over the course of Friday-Saturday. More than 400,000 accounts were affected. That is a lot of people being forced to sell their investments at big losses.
Forced liquidations usually result in a rather quick recovery, as more patient participants come in to “buy the blood” from the forced sellers. We saw this in May and saw it again last Friday. As before I believe the wash-out of leverage is positive for the overall health of the market. Hopefully now those coins are held by longer-term focused investors. However we will have to wait for more data before getting a better sense for whether this is true. I’ll be watching one of my favorite market insights platforms – Glassnode – for their next report of on-chain metrics.
As we near the end of the year, it’s a good time to revisit your plan and long-term goals. If you’ve made significant progress toward those goals this year (and if you’ve been attentive to this newsletter, I hope you have), it’s not a bad idea to “take some profits” and reduce your risk. If you’re on leverage or have taken on debt to invest, take the time to run through the “worst case scenario” and what you would do. You don’t want to get a nasty surprise like those 400,000 people did this past weekend.
I believe deeply in the long-term potential of crypto. I believe it is an amazing opportunity to create lasting generational wealth. But that will take time. You can’t expect 100x gains in a matter of months, and you can’t be in too much of a rush.
For me personally, it took years of patience weathering ups and downs before my investment strategy paid off. But that never would have happened if I hadn’t been patient and had resorted to leverage in, say, 2017, 2018, 2019, or 2020 (the Covid crash would have completely wiped me out if I was on any leverage). Crypto is volatile. The most important thing in this market is to stay in the game. We can do that as investors by managing our risk intelligently and resisting the urge to get carried away with FOMO.
Crypto News:
Miami Mayor Seeks Wider Crypto Use After Taking Pay in Bitcoin (LEARN MORE)
Jack Dorsey’s Square changes corporate name to Block (LEARN MORE)
Morgan Stanley Sees Crypto-Banking Regulation Arriving Faster Than Expected (LEARN MORE)
Bitcoin Drops $9K in an Hour on Spot Market Selling; El Salvador Again Buys the Dip (LEARN MORE)
Have a great week!
Shahar
This newsletter is meant for informational purposes only. It is not meant to serve as financial advice. If you are interested in financial advice, please schedule a personal consultation with me, and be sure to read the accompanying disclaimer.
