10 Billion Liquidated Within 24 Hours in Crypto
OK, we have to talk about leverage in crypto. It’s not as straight and simple as you might think. Large 8 figure traders got destroyed, and maybe even a trading firm or two.
I’ve written extensively about leverage, as I’ve had to learn the hard way. Today, I will only discuss the importance of always being protected against mega-bearish events like last weekend.
The wrong assumption - they used too much leverage
It is estimated that between 2 and 10 billion have been liquidated this past weekend. Hundreds of thousands of traders got carried out of the market on stretchers, broke and depressed.
In crypto and with stocks, traders and investors make one devastating mistake. They use their holdings as collateral for borrowing money and trading or investing it in the same direction.
Read that again:
People buy spot Bitcoin (Apple, Tesla stocks, Pepe, XRP, Sol…).
Then, they open a long position against that holding with an equal (1x leverage) or larger (over 1x) size, using it as collateral.
If the price goes up, they make double the money. Their core holdings increase in value, and their long positions make money.
The problem is when the price dumps violently!
I’m safe trading 3x leverage - FALSE!
That may be true-ish when using stable coins or fiat as collateral, but not when using coins or stocks!
If you hold 1 Bitcoin and it falls 30%, your margin is now at least 30% (more) smaller than before. If you bought 3 Bitcoins using this coin collateralized margin, you are now liquidated. On a 30% move, with only 3x leverage.
Assuming the price of one bitcoin at the start of the position is 100,000 USD, you had 100,000 USD collateral, and you BORROWED 300,000 USD against it.
When the price fell 30%, your collateral was now worth only 70,000 USD, and your leveraged position lost 100,000 USD!
Hence - the exchange protected itself and liquidated you well before that price hit bottom.
The exchanges, not unlike casinos, always win.
Now imagine this math using even higher-volatility assets like meme coins. You may wonder who would ever use meme coins that regularly devalue by 90% during bull markets. Apparently, quite a few wealthy traders!
I’m safe trading 1x leverage, I can’t get liquidated - FALSE!
If you had bought 100,000 USD of WIF, a dog with hat meme coin, for example, and used it for collateral against a levered long, you almost can’t win. Even if you are a top-tier trader who bought the pico bottom after it fell 40% but failed to implement appropriate risk management, you couldn’t survive what was coming.
100,000 USD collateral at 3 dollars per WIF used to buy only 100,000 USD, a 1x levered position, would have wiped you out in the carnage that followed! At a 50% dip in price from your entry (not the top!), you are naked and barefooted, crying to your mommy for a monthly allowance. Even a conservative 0.5 leverage would have wiped you out, and your entry seemed God-like mere days ago.
Here’s a simple rule: Separate spot holdings from trading using leverage.
Either use a stable currency for margin and use perpetual futures on leverage, or use two separate accounts—one for spot and the other for leveraged trading. Oh, and always manage risk!
No, you don’t need to only risk 1% of your portfolio on a trade
But you still need to manage downside risk. Only you can determine your risk tolerance, measured in financial and psychological denominators.
Statistically, 1-2% risk per trade is almost a guarantee that you will survive whatever comes, even the most harrowing of losing streaks, and we all have them. But yes, your upside is severely limited.
Important distinction
Keep in mind that when we talk about risk per trade, we aren’t talking about the whole position size but the amount of loss you are willing to tolerate before closing the trade.
You need to get comfortable calculating your risk when using leverage, as it’s not as easy as buying spot coins or stocks. Here is how you can calculate your appropriate position size when using a stop loss.
No stop loss? Small position sizing!
If you don’t want to use a stop loss, and I get it, it can be quite frustrating and useless when trading crypto, then you have to manage risk with appropriate and conservative position sizing! Nop, even smaller than what you’re thinking.
I got scratched in this dump but not hurt - there’s a difference!
I have made a few horrible mistakes:
I bought the Trump meme coin on a dip, betting the sitting US president would pump it up. I was wrong.
I bought DOGE on a pump when Elon’s official government web page displayed the meme coins logo. I was wrong.
I bought what I believed was the Fartcoin bottom on this dump. I was wrong.
My thesis was that there was at least a 50% chance that this new crypto-friendly US government would pump the markets. I was wrong.
Instead, we got something akin to trade wars, the largest liquidation event in crypto history (allegedly), and red across the markets.
I bought all of these on margin, as in perpetual futures, not spot coins.
All of the dumping happened when I slept (I’m European), so I was always caught off guard, and since I chose not to use a stop loss on such volatile assets and at such a extreme time, I got my ass handed to me! I hate it - I won’t lie! But I live to fight another day.
So, why wasn’t I liquidated?
Because I used relatively small sizing. In retrospect, way too high still, but well within safety margins. All of these coins can go to zero, and I’d still be fine.
As it stands, I’m looking at a 15% drawdown on open PNL concerning my trading portfolio. Too much, meh, not enough? A personal choice. I gambled on the most volatile coins just in case we pumped on some Trump executive order.
I knew the risk, and I took it willingly. I was willing to accept a possible 10% loss vs the chance of making 50% or more.
I preach risk management but sometimes fail to be strict enough with it, myself.
Was this the bottom, or should we expect more pain?
I have no idea. Liquidation events this size tend to mark at least a local bottom. That is my working thesis. I’m long and expect us to range for a while before retesting the bottom support or breaking up toward new all-time highs.
Having said that, the markets, hell, the whole world, are now a hostage of Donald Trump. For better or worse, TA is fairly useless in such conditions. Unfortunately, the price will do what Trump cooks up, and I can’t see into his head or the future.
I remain cautiously bullish while being aware that anything can happen overnight.
The first order of business will be getting myself out of these underwater positions and then buying quality things like Bitcoin for the next leg up, should my thesis of a Q1/2 bull market prove right. If not, we shall fight to stay alive and preserve as much capital as possible for better times. No risk - no gain!
Warning - don’t try to make back in one trade. Revenge trading leads only in one direction - to further losses. If you got hit, take a breather, touch grass, and wait for this volatility to pass. Survive, survive, survive.
Read the following articles for more:
Do this one thing, and treading with leverage won’t be dangerous
Alternative Risk Management Strategies to Using Hard Stops on Charts
Don't Like Using a Stop Loss? Here's a Quick Guide to Hedging
New to Trading and Investing? Start Here and Learn All About Managing Risk
Introduction to Risk in Trading and Investing in Cryptocurrency Markets
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