ABERDEEN, SCOTLAND – During the period running from Sunday to Tuesday, over a billion dollars were lost in an event which keeps recurring. It’s almost like clockwork. That’s the third time this year this has happened by my count, and I may well have missed a couple. Despite its regularity however, I struggle to understand it. And so too must all of those involved in losing that money. Perhaps you’ll be able to help me out…
It comes down to appetites, and how we as human beings succumb to them. As you might imagine, I was thinking quite a lot about this over the last month as I wasn’t eating anything. Now that I can indulge my appetite, I find that it is not what it was. Or at least, it certainly isn’t yet – at my current stage, I’m still appreciating how good milk tastes in tea and how strange chewing feels.
Some of man’s appetites are insatiable. They are testament to an underlying bestial nature which cannot be beaten out of him by civilisation, only controlled. One of his hungers however, is the opposite: a relentless desire which sets him apart from the beasts. And yet this force is even more capable of wreaking destruction.
I’m referring to mankind’s relentless appetite for leverage.
Ravenous for riches
Many years ago when the world seemed a smidgen simpler, a buddy of mine idly commented that “anything can be accomplished with enough leverage”. It was a provocative comment meant only half seriously. He probably doesn’t even remember saying it. But it’s stuck with me ever since, as I’m on the fence as to whether it’s true or not.
What couldn’t be achieved if you had enough leverage?
He was referring to all forms of leverage: physical leverage (the multiplication of force using tools), financial leverage (borrowing from the future to achieve an end today), and social leverage (the power of prestige, or blackmail). What cannot be accomplished if you had enough of one or all of these things?
Think about how much you could further yourself if you could tap an unlimited quantity of these three things. If you could grasp any of these three levers and pull on them as hard as you wanted. How much could you accomplish for yourself, how many wrongs might right if you could exert unlimited force, money, or influence? You could rebuild the world in your image…
With those utopian visions in mind, it makes sense how easily one could overindulge in the use of leverage. And indeed, why humans have and continue to overindulge in leverage to the point where it becomes destructive.
Man’s pursuit of physical leverage has led to the creation of atomic, biological, and chemical weapons. His pursuit of social leverage has led to mass-surveillance, and social media which has fuelled widespread egomania. And his pursuit of financial leverage has led to numerous hyperinflations throughout history and the grossly overindebted world we have today.
Why gold standards have worked well historically is their function in limiting man’s ability to access financial leverage – debt. It puts a hard limit on the money supply, and restricts excessive borrowing from the future. This constraint in turn leads to favourable outcomes across society – as Austrian economist Saifedean Ammous sums up so neatly in The Bitcoin Standard:
Some of the most important technological, medical, economic, and artistic human achievements were invented during the era of the gold standard, which partly explains why it was known as la Belle Epoque, or the beautiful era, across Europe.
And yet every gold standard has failed for the very same reason that it is successful: man’s hunger for financial leverage becomes such, that the gold standard is abandoned so that he may indulge in it. This is often to finance exercises in physical leverage (war) or social leverage (welfare).
“Please, sir, I want some more. more leverage. 150 times more.” – Oliver Twist, crypto trader
A billion dollars lost earlier this week is small fry against the backdrop of these broader themes. But I thought it was worth expanding on them first, as this weakness we humans have for leverage is a huge driver of investment returns – to be both feared and taken advantage of.
That billion dollars was lost when some traders applied a lot of leverage to an asset which I don’t believe (or even understand) anyone should apply leverage to. With the bitcoin price hitting $60k over the weekend, a lot of traders just got sucked into a fantasy of getting filthy rich overnight, and they levered up with bitcoin futures contracts.
To give you an idea of just how much leverage can be gained on BTC, you can effectively order yourself a heart attack. Thanks to the magic of smart contracts and unregulated crypto exchanges which use stablecoins pegged to fiat currencies instead of actual fiat currencies, there are exchanges out there which will offer you 150x exposure. 150 times – i.e., for every dollar it goes, up you get $150, and vice versa. On bitcoin.
Anybody engaging in such activity is about as close to being a werewolf as it gets to my eyes – you have to be an utter lunatic to do it.
But some do. That hunger for leverage is strong indeed.
So on the back of past performance, plenty of folks piled in, going heavily long on bitcoin futures.
And then a rumour went around that a large bitcoin “whale” had sent a billion dollars’ worth of BTC to the crypto exchange Gemini, suggesting that billion dollars of BTC was about to be dumped on the market. This, it turned out, was not actually the case. It appears the blockchain activity that suggested this was happening was in reality a large bitcoin holder (possibly even the Gemini exchange) manging their inventory.
But that was only revealed later, by which point the BTC price had dumped as everybody ran for the exits and a billion dollars of bitcoin futures contracts had been liquidated. Bye-bye werewolves.
Since then, the BTC price has recovered and is near its all-time highs again. It was all much ado about nothing.
This is the third time by my count that this has happened so far this year. You may well remember the big sell-off in January, which came as a relief to me as the price was going too high, too fast. Then again a month ago, when a BTC all-time high brought in another bought load of leveraged lunatics, who similarly got wiped out to the tune of a billion dollars in liquidations.
Nobody seems to be learning.
You want exposure to the price, just buy bitcoin. Find a trustworthy exchange. Learn how to take custody yourself with a hardware wallet if you can. If you’re feeling a bit more speculative than that and take a bit more risk, then you can do this.
No leverage. No futures. It’s volatile enough on its own. Don’t let the hunger get the better of you.
Upon pondering my friend’s claim for a long time, I’ve come to the following conclusion. There’s at least one thing I can think of that cannot be achieved with enough leverage. Indeed, there’s one thing which cannot be achieved with any leverage: stability. Total stability. And if I can get even close to that, then that’s good enough for me – as alluring as leverage may be.
All the best,
Editor, Capital & Conflict
Category: Investing in Bitcoin