Where's The Line
Leverage is a famous word that is used very often on social media platforms, especially when there's a dip or a market crash. People love to talk about how many accounts got liquidated as it sounds sensational, even shocking. Then comes the reaction to that, people saying leverage should be banned to prevent people getting rekt.
Unfortunately social media has a huge role in influencing people in every direction. Those who have managed to earn using leverage are bragging about it, but they always fail to do so when their positions are closed automatically with a loss as who likes to admit defeat, right? New uses are attracted to the possibility of earning big and quick and tend to neglect to learn what leverage really is, how it is working and what are the risks.
Some platforms like Binance for example allow users to take 100x leverage, which can grant you a lot of gains, as well as ruin you forever in a very short period. When you take a trade, you must have a plan and a well executed research, based on which you estimate where the market would go in the upcoming hours, but even the best ones can be wrong as once market makers step in, TA is useless. They are going to do everything in their power to drive the price where they want to, action which most likely is going to trigger some stop losses, create a cascade and liquidate a lot of people.
Some say leverage should be banned or at least limited in order to prevent people getting rekt. Binance, to cover their back side, has implemented a quiz you have to take before you are allowed to trade leverage and you have to answer all the questions correctly before they let you start.
Now there's a huge different between answering the questions correctly and actually knowing what you're getting yourself into. You can answer the questions correctly and still get rekt.
Some years ago trading was available only for professionals. You needed to attend specific schools, take some exams, get a license and so on. Now trading is available for everyone, without restrictions. Even if crypto is banned in your country, there are ways to avoid detection, so you can still trade. No license is needed, no knowledge is required at registration and it is available 24/7 for everyone, everywhere. This is freedom indeed. This is what we always wanted. Freedom.
So should leverage really be banned? That's an interesting question. What many don't know is that leverage is not just a high risk tool that can get you rekt, leverage has some good sides as well.
Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. source
So basically when you take leverage, you borrow assets. These assets (BTC, ETH etc.) must come from somewhere as Binance is not a bank, so they come from locked stakes. This is similar to how banks work (up to a certain point). You borrow other people's assets, but just as in life, nothing comes for free, you have to pay some fees, which are called funding fees. Those fees are paid every eight hours, which means you have to calculate the fees in your trade to be profitable.
I'd love to see some statistics about how many profitable trades has been done in a certain period vs hoe many positions got closed but at the end of the day this is not my point.
There is a say in the market that 90% of the retail traders lose 90% of their money in 90 days. source
It's tough to lose 90% of your money, but let's hope that can be a wake-up call for those, a reminder that capital preservation should be their No. 1 priority and also trading without a strategy equals gambling.
With all the bad leverage can create, I still don't think it should be banned or regulated. It should be up to exchanges and users to decide what and how. I bet if leverage would be banned, there would be a huge number of people protesting against it. There are countries in which leverage or trading futures is not allowed for this specific reason, while other countries still don't know what to do with it.
One thing is certain. Just because it's available, it doesn't mean you have to use it. Regulating leverage should be your individual decision, I mean you should know when to use it and how. Till then, stay away from it.
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