Why we recommend that BTC contract leverage should not exceed 3 times｜Market Observation

Original title: "Why we recommend that BTC contract leverage should not exceed 3 times | Market Observation"

Original source: Daiguan

The most important thing for investment is to be aware of the risks and implement corresponding risk control. Futures leverage is very common in the cryptocurrency circle. So, how to control the risk of leverage at the beginning? Let's take a look.

BTC daily price fluctuations, data source: yahoo finance, BTC-USD

This distribution is approximately centered around 1, and the standard deviation can be calculated to be 0.038788, or in other words, about 3.9%.

What does this standard deviation mean? Let's look at the figure below to find out. That is, the probability that the daily rise or fall falls within the range of plus or minus one standard deviation is 34.1% * 2. = 68.2%

In other words, the probability of a daily increase or decrease of more than 3.9% is 31.8%. So if you enter at a certain point, the probability of a decrease of more than 3.9% the next day is close to 16%.

When the leverage is 20 times, the platform's forced liquidation standard will be set at about 4%. So, for a 20 times leverage contract, the position will be liquidated once every five to six times.

This is why the platform likes players who offer 20x leverage: as long as you play with me, no matter how much you can earn each time, as long as you use full leverage every time, your money will be reduced to zero in five or six times.

So if you want your assets to be safer, how should you set the leverage?

From the chart, if you want to have a smaller risk, it is best to set the margin call risk of the leverage beyond 3 times sigma. At this time, the margin call probability is less than 1%, and the relative liquidation line is a drop of 11.7%, corresponding to a leverage of 5-6 times.

Another thing to note is that the percentage distribution of currency price increases and decreases is not a true normal distribution, but a fat-tail distribution, which means that the possibility of a large drop is greater than a normal distribution.

Therefore, in order to better reduce the risk, the leverage should be further reduced. According to the above calculation, the leverage on BTC does not exceed 3 times, which is relatively less risky.

Other currencies can be analyzed similarly. For many small currencies, double leverage is extremely unsafe. If you know some common sense of probability theory, you may be able to survive longer in this market.

This article is merely X-Order’s observations and reflections on the market and does not constitute any investment advice.