Risk management with leverage is simple, the problem is that speculators don’t know about it, or don’t apply it. If the standard deviation of my asset is greater than 20%, that alone equates to 5 to 1 leverage in terms of value at risk. Therefore, “leveraging” this asset by 3 times, is like having a leverage of 15 times debt, against 1 times equity. Borrowing on my asset to buy more, implies taking on more risk of loss, which has happened with various assets, including cryptos, and in particular with short positions. We should not leverage the leveraged… Do young traders understand this?
Continuing with this theme. If I invest in a stock at a price X, and the management of this company increases its liabilities after my investment, I will be affected, for better or worse, by my final value, regarding the conditions under which I bought it. Is this valid? Well, according to Forbes, the global net financial assets (not including real estate) are $431 Tn (USD denomination), while the total is $730 Tn. That means that the leverage in the world is $299 Tn, which in times of extremely high volatility, like the current one, we could say that it is not the most sensible thing to do… Do you agree?