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Is Bitcoin on a tightrope? What's the sudden rise in leverage ratio?
Hello everyone! Welcome to the virtual currency blog "John's crypto world"! Today, I would like to explain some interesting news in an easy-to-understand way for beginners. The topic is "Bitcoin's leverage ratio has increased, and it may be a bit dangerous."
What is leverage? Is it like debt?
First, let's explain the term leverage. Simply put, leverage is like the "principle of leverage." It is a mechanism that allows you to trade larger amounts with less capital. For example, you can trade 1 yen worth of money with 10 yen. This is like borrowing money to trade, so it may be easier to understand if you think of it as a kind of "debt."
Even in the world of virtual currencies, there are people who use leverage to trade. When you leverage, the possibility of making a profit increases, but the risk of losing money also increases, so you need to be careful.
What is the Leverage Ratio and what does it mean?
The important thing in this news is the "leverage ratio." Simply put, this is an indicator of how much leverage is being used. In this article, we will discuss how Bitcoin's leverage ratio is increasing, which means that more people are using leverage to trade Bitcoin.
Specifically, the article uses something called "ELR (Estimated Leverage Ratio)." This is calculated by dividing an exchange's "open interest" by the amount of Bitcoin held by the exchange. "Open interest" refers to positions that have not yet been settled, that is, positions that are still being traded. A high ratio means that traders are trading with larger positions (trade size).
What's wrong with increasing leverage ratios?
As leverage ratios increase, several risks increase.
- Vulnerable to price fluctuations: If you are using leverage, even a small drop in price can lead to large losses. For example, if the price of something you bought with borrowed money drops, you may not be able to repay the loan.
- Liquidation Risk: When prices suddenly fall, exchanges may forcibly liquidate the positions of those trading with leverage (this is called a "loss cut"). If many people are liquidated at the same time, prices may fall further, creating a negative chain reaction.
Summary: Bitcoin, should you be careful?
This news tells us that Bitcoin's leverage ratio is increasing. This suggests that the Bitcoin market may become a little unstable. Of course, it doesn't mean that a crash will occur immediately, but it seems necessary to keep an eye on market trends.
The world of virtual currencies is constantly changing. This news is part of that. It is important to understand the risks and trade in a way that suits you.
Today's news may have used some difficult words, but were you able to get the general idea of what was going on? There's no need to memorize difficult technical terms. First of all, it's important to have a rough understanding of what is happening.
Personally, I think that leveraged trading is risky and should be avoided by beginners. I recommend starting with a small amount and getting used to the mechanism of virtual currency and market movements.
This article is based on the following original articles and is summarized from the author's perspective:
Late April spike in Bitcoin's estimated leverage ratio
raises liquidation risks
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