Bitcoin, Dogecoin and Ethereum’s over 50 per cent collapse from their all-time highs sent shockwaves throughout the financial markets, with many writing off the asset class for its extreme swings.
Cryptocurrency investors would tell you that such rapid declines are part and parcel of life of a cryptocurrency investor, as it is an accepted notion that the asset class is significantly more volatile than others such as equities, commodities and bonds.
The main reason behind the selloff was the liquidation of positions in the market that were based on leverage. In a 24-hour period on May 20, as many as 887,000 traders had their accounts liquidated, according to data on Bybt.com.
“It is, therefore, interesting that there has not been more overt damage sustained, in terms of bodies surfacing. This is a refreshing aspect of the crypto universe, which is intrinsic to its decentralised nature, and certainly contrasts with the almost instantaneous pleas for bailouts, and related central bank easing, that coincides with any sharp downdraft in conventional markets,” Jefferies’ Global Equity Strategist Christopher Wood wrote in his GREED & fear report.
Leverage is easy to get in the world of cryptocurrency where hypercompetitive brokers and stock exchanges are vying for relevance and market shares. In some places in the world, cryptocurrency exchanges and brokers are willing to provide 100 times leverage to their clients for trading in cryptocurrencies.
“If it is really true that it is possible to get 100x leverage on crypto assets in some jurisdictions, even GREED & fear would have to admit that some prudential regulation is warranted,” Wood said.
Wood said he would not advise owning cryptocurrencies on leverage.