This past week, there have been reports of significant liquidations in the bitcoin market.
To clarify, the term “liquidation” in a financial context indicates a situation where a trader must close a leveraged position because their margin has been exhausted.
In simpler terms, it describes a scenario where an individual borrows funds to speculate on bitcoin’s price movement and ends up facing losses greater than their original investment if their prediction is incorrect.
When trading bitcoin with leverage, I always keep in mind an insightful remark from a previous post:
A fool and his leveraged #bitcoin are soon parted.
To quote one of my instructors, “up 6% today, down 100% tomorrow.”—@aantonop
To quote another, “#notyourkeysnotyourcoins”
Be cautious out there. @michaeljburry is spot on—there’s a significant amount of concealed leverage in #bitcoin. Caveat emptor.
— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) June 20, 2021
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Hence, the primary lesson in bitcoin investing is to avoid using leverage. (This isn’t financial advice, just a personal observation.)
Although bitcoin currently boasts a market capitalization of approximately $2 trillion, it remains a highly erratic asset. Its value can change drastically due to news events, making it considerably safer to purchase bitcoin on the spot market and hold it for several years.
Moreover, when you decide to invest in bitcoin on the spot market, it’s advisable to limit your exposure rather than overextend yourself (these terms can be subjective; interpret them as you see fit).
If you find yourself overexposed to bitcoin or if you’re a newcomer who has invested heavily in it, the chances of a panic sale increase significantly if the prices drop substantially in the short term.
How can you identify if you’re overexposed? You might begin to lose sleep or emotionally invest in the hope of bitcoin’s price only moving in an upward direction.
I share this from personal experience. I was overly invested in bitcoin during 2021-2022 and frequently felt anxious as a result. Reducing my exposure allowed me to feel more at ease and think more logically.
Establish an investment ceiling that you’re comfortable with, and plan for a long-term hold.
The mindset of trying to get rich quickly with bitcoin often leads to losing money instead.
Take your time and adhere to the sound advice from renowned Bitcoiner Matt Odell: remain humble and stack sats.
(The opposite of this prudent guidance would be: act irrationally and gamble on bitcoin without caution.)
Stay vigilant.
This text is a Take. The views expressed are solely those of the author and do not necessarily represent the positions of BTC Inc or Bitcoin Magazine.
