Why we recommend that the leverage of BTC contracts should not exceed 3 times

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 can we 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. In other words, the standard deviation is approximately 3.9%.

What does this standard deviation mean? We can see it from the figure below. That is, the probability that the daily rise and 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 drop 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 open 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 reduce the risk, it is best to set the margin call risk of the leverage outside 3 times sigma. At this time, the probability of margin call 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.

Similar analysis can be applied to other currencies. For many small currencies, double leverage is extremely unsafe.

If you know some common sense about probability theory, you may be able to survive longer in this market.