First Encounter with Leverage

I was never a strong believer of playing around with leverage. Especially platforms that allow you to go on 50x leverage, with some even up to 100x.

Leverage is not easy for retail investors to implement into a long-term portfolio. It require risk management and position sizing.

These are some arguments that could be made for retail investors/traders to use low-leverage:

  1. Hedge against their downsides
  2. Thrill of gambling

Of course, not all forms of leverage are the same. Some like options have a limited downside that the option buyer know beforehand. Some like margin trading and futures, the downside is not beforehand. You would know how much you have lost as you lose the money.

Conviction

Since early 2020, after learning about Bitcoin and doing some research on it, I was convinced that it could be like a digital gold. It would act well as a diversification towards the store of value portion of my portfolio. But, I was just mildly bullish on it, similar to my opinion on gold at the time.

Fast-forward a year to March 2021, Bitcoin was fluctuating around $50,000. My conviction was reinforced, partly due to this large move in price. But, mostly due to the time I spent researching into the crypto space. I was beginning to watch Real Vision, a great platform with expert insights into the market, although there has been a slight bias towards crypto-based topics.

Then come the May crash where Bitcoin dropped ~50%. In retrospect, I should have bought some more Bitcoin, perhaps dollar-cost-average in, since my conviction in it had gotten stronger.

I began to follow the voices in the crypto-space. Learning about new coins and what they aim to do. At this point, I was relatively aware of the downside to Bitcoin, it would be hard to use it as a medium of exchange due to the transaction cost.

Having learnt more about crypto in general, I began to research into other coins. I could see their use cases and each of their selling point.

Yet, Bitcoin will stood out even amongst this space. The other coins are mainly trying to provide utility. Be it medium of exchange, bridge between different coins, banking the unbanked.

Perhaps initially, it was meant to be digital cash, used for transaction. However, currently those that understood Bitcoin knows that it just aims to be one thing – digital gold – a store of value.

With my level of conviction, I was simply waiting for a chance to enter a small long leverage position on Bitcoin.

Perpetual Futures

Then, the opportunity came when I saw a Twitter post (yes, Twitter of all things) about Bitcoin’s realized market cap exceeding its previous high despite the market cap still ways away from its ATH.

Bitcoin Realized Market Cap

I believe that it is a strong technical indicator towards a bull run. 

But I still kept my caution attitude as I did not believe very strongly in technical analysis. It was also my first time dabbling in perpetual futures so I placed a moderate position of 2% of my net portfolio. For the upside it might bring, I am willing to take this risk.

The platform of choice for me was binance.com

For privacy reason, I am not going to expose my position size. But, let’s assume that $1k was placed into the position.

Margin: $1k     Leverage: 5x    Entry price: $50k    Funding rate: ~0.01% daily

It would take a 20% drawdown for my position to be liquidated. Seems reasonable.

Long story short, I was liquidated. And here’s what I learnt about perpetual futures:

  1. Funding rate is deducted from the margin.
  2. For higher leverage, timing is crucial. 

Here’s an elaboration on the second point. If you are leveraged 100x, you only have 1% margin of error before liquidation. Directional timing matters a lot.

But, timing is also important so that the funding rate do not eat too much into your margin. Imagine the below scenario.

Margin: $1k    Leverage: 50x    Entry price: $50k    Liquidation price: $46k    Funding rate: ~0.01% daily

After one month, there would be a 15% lost on margin due to the funding rate. Due to the decrease in margin, the liquidation price would also increase. You could read more on funding rate here.

To trade on high leverage perpetual futures, you need to be certain of both direction and timing.

Conclusion

Leverage by itself is a tool, the results is can provide is still ultimately based on its user. It could be used as a hedge or a speculation.

As for perpetual futures, my outlook on it is definitely more positive. After trying it out, I can see how it has the potential of being a hedge.

However, I don’t think I would use it anymore to chase after the upside gains. Even the best case scenario, where the price of Bitcoin appreciate heavily, it would simply mean that the funding rate would eat more into the margin.

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