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Saturday, 14 February 2015 00:00

The Attributes of the Use of Insane Leverage In UltraCoin Trades Featured

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An employee at Veritaseum asked me a very simple, but initially perplexing question last night. He said, "All other parameters being equal, what's the difference between an order with 10 BTC principal at 1x leverage and 0% collateral, and an order with 1 BTC principal at 10x leverage at 900% collateral?"

Well, to answer that question, I want to direct everyone to our trade modeling spreadsheet (which definitely comes in handy when designing more complex trade setups and fleshing out less than obvious ideas). What I did to answer his question was to create the two trades independently using a forex setup. The first trade setup looked like this:

1BTC levered 9x thin forex profit

The trade looked like this at expiration (remember these are illustrative results, not necessarily or accurately indicative of actual trade results for a whole lot of mumbo jumbo legal reasons):

10BTC thin forex profit

This what the trade would have resulted in if we used 1BTC as the principal, 9 BTC as collateral and 10x leverage, which would have effectively given you the same amount of purchasing power with the same amount of capital committed.

1BTC levered 9x thin forex profit chart

This is what would have happened to both trades above if BTC prices were to drop by a whopping 40% before the trade ended, but after the trade began...

1BTC levered 9x thin forex profit chart with 40 drop in BTC prices

Yes, that would hurt, and it would hurt a lot! That chart was one of the biggest objections given to me about the new UltraCoin trading system, the need to be exposed to bitcoin volatility in order to trade. But, there's gold at the end of this rainbow. Check out what happens when we drastically ratchet up the leverage to levels insane! At 1,100x leverage, look at what happens to that same 1BTC trade with 9BTC collateral when winning a thin forex profit...

1BTC levered 1100x thin forex profit chart with 40 drop in BTC prices

That's correct! Even with the price of the underlying BTC dropping almost in half... Net of all transaction, transmission and leverage fees... Even with not the fattest in profits (well, maybe fat for a forex trader)... This trader was able to eek out a 8.1% profit exiting the trade. The ability to leverage "insane" can insulate the winning trade from normally deadly levels of BTC volatility and price fluctuation.

If you don't believe me, look at the same trade setup, except in all cash with 1,100BTC and not leverage or collateral...

1100BTC levered 1x thin forex profit chart with 40 drop in BTC prices

I don't want anyone to think that insane leverage is a panacea, or even safe, for novice traders - but as you can see it does have its uses. I want to remind everybody that the leverage used is bounded (both on the profit and the loss side) by the principal+collateral posted. These next 4 charts tell the story. Look at the trade setup up wtih a 20% gross gain - levered 1,100% and unlevered (this is explicitly unlevered to illustrate a point, not the same purchasing power being put upfront in cash as modeled in the other examples above).

1100BTC levered 1x with 20 forex profit chart with no drop in BTC prices

As you can see, we profits are bounded by the capital sent to the blochchain as escrow (you get a maximum of what you and your counterparty have agreed to commit to the transaction - and not necessarily 20% of the face price of the profit x 1,100%). Similarly, your losses are capped in the same fashion.

Just for education's sake, this is the same trade with the entire amount put up as principal and no leverage or collateral.

1100BTC levered 1x with 20 forex profit chart with no drop in BTC prices real

Basically, after fees, you get a little less than 1/4th the return, while having to commit a lot more capital.  

These trading concepts should come in handy this year when we tackle things such as the Danish National Bank (their central bank) telling us things that Reggie just doesn't believe are sustainable. Feel free to reach to me personally if you have any questions. 

Read 2541 times Last modified on Tuesday, 17 February 2015 12:02

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