$19.5bn is quite a big number - and exceeds the prior record of $2.2bn from February 2025 - and boy don't we all have fond memories of early 2025 (when Trump had seemingly gone insane in his quest for more and more tariffs).
But this event dwarfed that, in a crash that clearly had consequences for peoples' financial wealth - particularly for those who have come to rely on leverage to supercharge their positions. As Google AI can explain :
Crypto leverage trading works by using your capital as collateral (margin) to borrow funds, which allows you to control a larger trading position than your own capital would permit, amplifying both potential profits and losses. For example, with 10x leverage, a $100 deposit lets you control a $1,000 position. If the market moves in your favor, your gains are multiplied; however, if it moves against you, losses are also magnified, and insufficient collateral can lead to a margin call and liquidation of your position.
The appeal is rather obvious... in a world where prices tend to predominantly go in one direction (and Cypto does long-term tend to follow a rising trend), leverage can give those who are brave (or stupid) enough an opportunity to make some serious sums of money. But this does carry with it an element of risk.
A Possibility of Riches
But one of my long-held thought ideas is that it might be smart to take your first £100k, take it to a casino, and pick a number on the roulette wheel on which to bet that money.
My logic is simple - many people will at some point end up reaching a point where they have their first £100k. It takes a certain amount of sacrifice to accumulate this much capital, but on a good salary it is certainly very possible.
But if you consider the odds of those people getting from that first £100k to their first £3.4 million, there is a part of me that wonders if it would be worth risking that £100k to have a one in thirty-five chance of reaching that millionaire status. A one in thirty-five chance leaves a lot of room for disappointment, but the life you can live with £3.4 million might be worth taking that risk for.
What makes this scenario more interesting is that whether it is smart or not would largely depend on circumstances.
For someone who would really struggle to get together that first £100k it would be daft to take the risk, but there are other people who could bounce back from that £100k loss and still have an okay life - whilst still being highly unlikely to ever become a multi-millionaire.
My belief is that it is this sort of scenario that traders using leverage are replicating - but swapping out the spin of a roulette wheel for the more favorable odds of the Crypto markets.
A Hypothetical Example
To explore this further, let us take on a fictional position in the world of Crypto - and here I am going to suggest that we buy Solana back in January 2025 at a price of $218 - with a target price of $250 by the end of 2025. Alongside this we are going to layer in stop losses at $200 - and these stop losses should give some safety to our bet as we can use them to cap our losses at -50%. This should at give us a second roll of the dice (albeit with less capital) should our trade go against us.
These stop losses change the nature of the scenario, and here I would characterise their use as if we were re-running our roulette wheel scenario - but trading off a reduced chance of success with a significantly decreased chance of complete failure.
For example, when we turn up to the roulette wheel we could instead choose to bet first on red or black, rather than on a single number. If this were successful we could then take back our initial stake, and roll the other half into a bet on a single number.
By doing so we could create three outcomes - a 51.35% chance of losing everything (down from 97.37%), a 1.39% chance of getting £3.4 million (down from 2.63%), and a 47.26% chance of leaving the casino with the same funds we arrived with. A 1.39% chance of getting £3.4 million still seems good and we otherwise have more of a 50-50 bet as to whether we lose all our money or not.
Replicating this on our fictional trade, we are going to invest our first £100k into the trade - but to try and get a decent upside outcome comparable to a number bet on the roulette wheel we are going to supercharge it with leverage at five times our investment value. This will allow us to buy 2,752 units of Solana instead of the 459 our investment would otherwise buy.
Should all go to plan we aim to eventually walk away with a profit of £88k (a return of 88% on our invested capital before any borrowing costs). Should this be achieved before the end of 2025, our annualised return should exceed 100%.
Now let us fast-forward five months - and by June everything is going to plan, the price of Solana is at $237 and we are up £52k. But, as things roll into October we have had to be very patient with our investment - for the price has slowly drifted down towards $222 - meaning that we retain only a very small profit.
But this is hardly a disaster, for we are still comfortably above our stop losses at $200 - and it won't take much for the market to return to a more positive trajectory.
Unfortunately for us though, we get hit by the events of last Friday - and at 5pm the market responds to tariff news from Trump, and drops sharply to $211 - before starting to creep down to a low of $205 by 8:40pm.
By this point we are starting to get uncomfortably close to our stop losses at $200, but so long as this is the worst of the dip we might just about be able to see this one out. And indeed over the next hour there is a small rally, pushing the price up to $207 as people buy the dip - but then disaster strikes at 10pm, as the price drops sharply to $176.
If we are lucky our stop losses will have triggered fairly close to $200 - but with so many other market parties having similarly priced stop points, the reality is that there probably isn't enough exit liquidity and that we end up being liquidated.
Despite our attempt to control the risk with stop losses, we end up in that part of the casino example where our capital is completely gone. And if this doesn't feel bad enough, late on Sunday we get a backtrack from Trump on his statement - and the talk of the market is that he misread a communication by the Chinese government, and responded to a nothing event.
Indeed by the time I write this article on Monday, the price of Solana is climbing up towards $200 - and it seems likely that the price will slowly climb back up through the week as people look to retake Crypto positions. Whilst this is a fictional example, the prices I'm using are real - and there are real people who have taken on trades that look just like this example.
Indeed the socials are full of traders who have been wiped out in the crash - many of which have lost multiple years of combined trading gains and accumulated salary contributions. To quote one of those traders:
I will try to build my cash position and just wait for the cycle end and start deploying cash into BTC when price drops below 90-80k again. Maybe in next 6-7-8 years I will get back to the point I was before I got wiped out. And of course I tell myself I will never touch leverage again
Now obviously this use of leverage is very dangerous, but we must consider that it was the same use of leverage that turned these guy's small portfolios (that were not big enough to turn into anything big through normal investing principles) into portfolios that have made them millionaires.
The fact that you can make millions from such an approach is undoubtedly true, but the surprising aspect is not that the guys taking on high levels of risk have lost money, but that many of the complete losses are for big sums of money - some as much as tens of millions of dollars.
These are guys who played the casino game and walked away with £3.4 million, only to pause at the door and think about what would happen if they rolled their £3.4m, for a shot at £115.6m. The chutzpah I have to applaud, but the logic I cannot.
The problem is that it is very rarely just about getting enough money, it is also about the seduction of higher returns - and there is seemingly never a sum of money that stops people looking over their shoulder at better returns.
The Temptation of More
With this in mind, let us head back in time to 1999, to the height of the tech boom to see just how easy it is for the market to influence our activities.
Back in 1999, one of the great investors of our times - Stan Druckenmiller - had decided that the soaring value of tech stocks was not the sign of a paradigm shift, or some complete transformation in terms of how money could be made - it was in his opinion a bubble that would eventually burst.
And so it was that he found himself carrying a $200m short on these stocks - only to take on losses of $600m as the market soared against him. By May he was 18% down, whilst the NASDAQ had soared 15% - and it was time to close out these trades which had been dragging down the performance of his fund.
By this point it was not only getting a little embarrassing, but investors were also starting to doubt if he had lost his touch as a market manager. Eventually Druckenmiller started to relent, and added some exposure to tech stocks within his fund - with the guys he hired to add some tech exposure ending up outperforming the rest of his fund:
So the next thing that happens is I can’t remember whether I went to Silicon Valley or I talked to some 22-year old with Asperger’s. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gun slingers because we only knew about IBM and Hewlett-Packard. I needed Veritas and Verisign. … So, we hired this guy and we end up on the year – we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq’s gone up 400 percent.
Druckenmiller was convinced enough to get these guys in, but only convinced enough to give these guys a small portion of the fund. But as they kept outperforming the rest of the fund he started to relent - his fund wasn't performing in one of the greatest wealth accumulation periods in history, and he had to do something:
They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year.
I think Quantum was up seven. It’s just sitting there. So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks and in six weeks I had left Soros and I had lost $3 billion in that one play.
Risk and Position Sizing
On paper it is easy to assess risk and to take on correctly sized positions in your portfolio - the problem is that in reality it is always a lot more complex.
These are different stories, with different lessons and things to think about, but overall when you look at the money markets in the US, we seem to have returned to an era where gambling has taken over from investing.
In Crypto the levels of leverage seem to be climbing, and I find it hard to believe that the liquidations suffered in that sector were not the result of excessive levels of leverage. This becomes particularly problematic when you face a mass margin call events, as swathes of the market are forced out of positions all at the same time.
But this is not just about Crypto, because the same leverage carries over to retail investors taking positions in the stock market - and within the Private Equity world there simply seems to be too much money floating around.
As the levels of money supply within the world of Private Equity have continued to climb higher, the valuations over the last decade seem to have just kept rising. Now those insane valuations seem to have carried not only into public stock valuations when PE companies list (take HubSpot as an example), but also into companies with no Private Equity background like Costco (a 52 PE for a retailer, really?).
And when I say public listings, I do mean US public listings, because whilst valuations have been driven up in the US, French stocks struggle to achieve any reasonable sort of valuation, ditto for UK stocks, and so on across much of the world beyond the US borders.
Maybe this is all just the consequence of all these years of low cost debt, and the different appetite to debt and risk in different markets - or maybe it is just the outcome of a world where the best way to get ahead is to take on leverage and to make some aggressive trades.
I'm not entirely sure what it all means or how it will play out, but ultimately I think you have try and think about about what your end goal from investing really is. Yeah there might be a logic to gambling your way to your first million, but after that it might be time to cool the jets and dim the risk.
When you start out, the biggest challenge posed by investing is getting together enough capital to invest in a meaningful way - because even at 20% returns, a portfolio of £20k will only deliver £4k annually - while with £2 million of capital that same figure only needs 1% returns.
The big lesson of the Cypto markets this weekend is probably that you really do need to know when you have made it. Cool those jets, take it easy and realise when you've already achieved what you needed.
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