Bitcoin’s recent rally to new highs has ignited widespread optimism, with many calling for further upward movement. However, market veterans are cautioning traders and investors about the risks of using leverage, despite acknowledging Bitcoin’s long-term potential.
Leverage Trading: A Double-Edged Sword
Fred Krueger, an experienced finance expert, has issued a stern warning against using leverage for Bitcoin trades. In a post on X on December 19, Krueger referred to Bitcoin as “likely the single best trade ever” but cautioned that many traders risked undermining their gains with leveraged positions. The use of leverage allows traders to control more capital by borrowing from brokers, aiming to amplify their returns. However, this also increases the risk, as traders are exposed to the possibility of higher losses if the market moves against them.
Bitcoin is the best trade you will probably ever see.
— Fred Krueger (@dotkrueger) December 19, 2024
There is exactly one way to screw it up.
Leverage.
John Deaton, a prominent pro-crypto lawyer and former U.S. Senate candidate, echoed Krueger’s sentiments, emphasizing that leverage trading in the volatile crypto market made little sense. He instead recommended that investors hold Bitcoin directly, citing its status as “the best performing asset of all time.”
I’ll admit, at times, in the past, I’ve used margin to buy stocks. I’ve been burnt and done well. But I’ll never understand using leverage with bitcoin or crypto. Just employ the KISS method: Keep it simple stupid. Bitcoin’s the best performing asset of all time. Just own it. https://t.co/uGC0FegTVW
— John E Deaton (@JohnEDeaton1) December 19, 2024
The Risks of Leverage: Margin Calls and Liquidations
The primary risk of leverage trading is the potential for amplified losses. When the value of Bitcoin drops, traders using leverage may face margin calls, requiring them to deposit additional funds to maintain their positions. If they fail to meet these calls, their positions may be liquidated, meaning their assets are sold off automatically to cover the losses. This dynamic has recently played out for many Bitcoin traders.
Also Read: Federal Reserve’s 25bps Rate Cut Triggers Market Selloff: Cryptos and Stocks
$140 Million in Losses Amid Market Decline
In the past 24 hours, Bitcoin traders using leverage have collectively lost over $140 million, according to CoinGlass data. These losses occurred after a sharp decline in Bitcoin’s price from highs of $106,500 on December 18 to lows of $98,800 the following day. The sudden drop was triggered by hawkish comments from Federal Reserve Chair Jerome Powell, who stated that the central bank’s fight with inflation was ongoing. Powell indicated that interest rates would likely remain higher for a longer period, with only two quarter-point rate cuts projected for 2025, a stark contrast to earlier projections of four cuts.
The Bottom Line: Caution Is Key
The recent market volatility underscores the risks associated with trading Bitcoin using leverage, particularly in an environment of shifting macroeconomic conditions. While Bitcoin remains an attractive long-term asset for many, experts like Krueger and Deaton advise caution, recommending that investors focus on holding rather than leveraging in a market that can be unpredictable and highly volatile.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
About The Author
