when leverage works and when it kills you
why the derivatives that rallied bitcoin are the same ones that will crash it
had a conversation with a trader this week about derivatives. he was explaining how a 10% move in bitcoin can become a 50% move in leveraged positions. i asked him: how much leverage is in the system right now?
his answer: too much.
not a number. a direction.
here's what matters: the same leverage that's driving rallies right now is the tail risk for crashes. when you have 10x leverage and the market moves 11%, the position liquidates and becomes a market sell.
this is a feature of every financial system. it's not a bug. it's how the system balances itself: through cascading failures.
if you're building a financial company, you have to assume that leverage will blow up your customers at some point. the question isn't whether it will. it's whether you'll be prepared.
the best exchanges have circuit breakers. the best risk managers know their liquidation cascade. the best founders build for the moment when the leverage unwinds.
are you building for the rally or for the crash?