Caitlin Long, the co-founder of Custodia Bank and a former commissioner of the Wyoming Division of Banking, believes that Bitcoin is not an asset that is designed to be leveraged.
In an interview with Cointelegraph, Long said that Bitcoin is a store of value and a medium of exchange, but it is not a productive asset. Productive assets, such as stocks and bonds, generate cash flow, which can be used to pay interest on debt. Bitcoin, on the other hand, does not generate cash flow.
Long also said that Bitcoin is a volatile asset, and that leverage can amplify volatility. This means that leveraged Bitcoin positions can lead to large losses if the price of Bitcoin declines sharply.
What is leverage?
Leverage is a financial technique that allows investors to amplify their gains and losses. Leverage is typically used by investors who are confident in their ability to predict the direction of the market.
Leveraged Bitcoin positions can be created using a variety of financial instruments, such as futures contracts, margin trading, and CFDs. These instruments allow investors to trade Bitcoin with a small amount of capital, but they also expose investors to a high degree of risk.
Why does Long believe that Bitcoin is not an asset that is designed to be leveraged?
Caitlin Long believes that Bitcoin is not an asset that is designed to be leveraged for a few reasons. First, Bitcoin is a store of value and a medium of exchange, but it is not a productive asset. Productive assets, such as stocks and bonds, generate cash flow, which can be used to pay interest on debt. Bitcoin, on the other hand, does not generate cash flow.
Second, Bitcoin is a volatile asset. Leverage can amplify volatility, which means that leveraged Bitcoin positions can lead to large losses if the price of Bitcoin declines sharply.
Third, Long believes that the Bitcoin market is not yet mature enough to support leveraged trading. The Bitcoin market is still relatively small and illiquid, which can make it difficult to execute leveraged trades quickly and efficiently.
What are the risks of leveraged Bitcoin trading?
Leveraged Bitcoin trading is a risky activity. Investors who use leverage to trade Bitcoin are exposed to a number of risks, including:
- The risk of losing their entire investment. If the price of Bitcoin declines sharply, leveraged Bitcoin positions can be liquidated, resulting in a total loss for the investor.
- The risk of margin calls. If the price of Bitcoin declines, leveraged Bitcoin positions may require additional margin. If the investor is unable to meet the margin call, their position may be liquidated.
- The risk of slippage. Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. Slippage can be significant in volatile markets like the Bitcoin market.
- The risk of fraud. There have been a number of cases of fraud in the Bitcoin market. Investors should be careful when trading Bitcoin with leveraged instruments.
Bitcoin is a volatile asset, and leverage can amplify volatility. This means that leveraged Bitcoin positions can lead to large losses if the price of Bitcoin declines sharply.
Investors who are considering leveraged Bitcoin trading should carefully consider the risks involved. They should also make sure that they understand the mechanics of leverage and how to use it safely.
