Over the course of the last week, we’ve seen reports of massive bitcoin liquidations.
For those unfamiliar with the term “liquidation” as it applies to finance, it refers to when a trader is forced to close a leveraged trade because the margin for the trade has been depleted.
In everyday pleb terms, it’s when someone borrows money to bet on the direction of the price of bitcoin and they get it wrong, resulting in their losing the money they put up for the trade (or more, in some cases).
When it comes to trading bitcoin with leverage, I keep in mind the first line from the post below:
A fool and his leveraged #bitcoin are soon parted.
To quote one of my teachers, “up 6% today, down 100% tomorrow.”—@aantonop
To quote another, “#notyourkeysnotyourcoins”
Be careful out there. @michaeljburry is right—there’s a lot of hidden leverage in #bitcoin. Caveat emptor.
— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) June 20, 2021
So, lesson number one in investing in bitcoin is don’t do so with leverage. (Not financial advice.)
Even now that bitcoin has about a $2 trillion market cap, it’s still a highly volatile asset. Its price fluctuates notably in response to news. Because of this, it’s much safer to just buy some bitcoin on the spot market and hold it for the long run (at least four years).
What is more, when and if you choose to buy some bitcoin in the spot market, consider remaining underexposed to bitcoin instead of overexposed to it (those terms are subjective; interpret them as you will).
When you’re overexposed to bitcoin, or if you’re new to the market and you’ve gone all in on bitcoin, it’s more likely that you’ll panic sell if its price tanks in the short term.
How will you know if you’re overexposed? You’ll likely begin losing sleep over it and/or being investing emotional energy in hoping that bitcoin’s price moves in a certain direction (up only).
I share this based on experience. I was overexposed to bitcoin in 2021-2022, and I often felt sick because of it. Once I lessened my exposure, I felt better and was able to think more clearly.
Find an investment threshold with which you’re comfortable, and, again, plan to hold for the long haul.
Aiming to get rich quick with bitcoin is nearly a sure fire recipe for getting yourself rekt.
Take it slow, and heed the very wise advice of legendary Bitcoiner Matt Odell: stay humble, stack sats.
(The inverse of such sage advice would be: be irrational, bet on bitcoin irresponsibly.)
Be careful out there.
This article is a Take. Opinions expressed are entirely the author’s and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.