High Leverage Investing: Quick Wealth or Abyssal Trap?

Many novice investors are attracted by promises of high leverage—controlling $1 million in assets with just $100,000 of capital, potentially doubling their returns. However, the 2022 case of Korean YouTuber Satto, who lost over $10 million within hours after opening a 25x leveraged long position on Bitcoin during a live stream, reminds us: high leverage is like a double-edged sword, amplifying both gains and losses infinitely. This article will delve into the essence, risks, and strategies of leveraged trading to help you pursue returns without falling into a bottomless pit.

Real Costs of High Leverage: Lessons from Liquidation Cases

Satto’s painful experience is not an isolated incident. He opened a 25x leveraged position on Bitcoin at $41,666, expecting the price to rise. When the market reversed and Bitcoin dropped below $40,000, he failed to cut losses in time and instead added to his leveraged long, ultimately leading to liquidation—that’s the most terrifying outcome of high leverage trading.

What is liquidation? Simply put, when your losses reach the margin limit, the broker or trading platform forcibly closes all your positions to prevent further losses from affecting the platform’s funds. At this point, you not only lose all your principal but may also face a call for additional funds to cover losses.

Many young investors enter the market with the mindset of “win big if I win, don’t need to top up if I get liquidated,” but markets don’t compromise. During volatile swings, high leverage can easily trigger “margin calls” (forced liquidation), instantly turning paper profits into real losses.

The Essence of Leverage Trading: Borrowed Money Amplifies Effects

To understand high leverage, first grasp the basic principle of leverage. Leverage trading is essentially “borrowing to trade”—using a smaller amount of margin to control a larger position. Ancient mathematician Archimedes once said, “Give me a place to stand, and I will move the Earth.” In financial markets, leverage’s power is indeed astonishing.

For example: You have $100,000 of your own funds, borrow $900,000 from a broker or platform, and make a total investment of $1 million. This is 10x leverage. The formula for leverage multiple is straightforward:

Total Investment Value ÷ Your Margin = Leverage Multiple

Taking the Taiwan index futures as an example, suppose the recent closing price is 13,000 points, with each point worth NT$200. One contract’s nominal value is:

13,000 points × NT$200 = NT$2.6 million

But you only need to pay the margin (say NT$136,000). Your actual leverage is:

NT$2,600,000 ÷ NT$136,000 ≈ 19x

This means with NT$136,000, you can control NT$2.6 million worth of assets. It sounds tempting, but both gains and losses are magnified by the same multiple.

The Dual Effect of Leverage Trading: Gains and Losses in Balance

Scenario 1: Taiwan index rises 5%

If the index rises from 13,000 to 13,650 points:

• Profit = (13,650 - 13,000) × NT$200 = NT$130,000
• With NT$136,000 margin, you earn NT$130,000, a return of about 96%
• High leverage works perfectly in favorable markets

Scenario 2: Taiwan index falls 5%

If the index drops from 13,000 to 12,350 points:

• Loss = (13,000 - 12,350) × NT$200 = NT$130,000
• Your principal is nearly wiped out, approaching total loss

The same 5% market fluctuation, under high leverage, can wipe out your entire capital. That’s why the industry calls high leverage the “equation of returns and risks”—you get high returns but also face high risks of significant losses.

Advantages of High Leverage

• Enhanced capital efficiency: Small investors can participate in large trades, saving on transaction costs.
• Increased profit multiples: The same market movement yields larger absolute gains.

Disadvantages of High Leverage

• Increased risk of liquidation: Higher leverage means a smaller market move can trigger forced closure.
• Losses magnified infinitely: A single wrong move can wipe out all capital or even lead to debt.
• Psychological pressure: Volatile positions can cause emotional decision-making.

Comparing Four Investment Tools: Choosing the Right Leverage Method

There are many leveraged trading tools, each with its characteristics. Choosing the wrong one can ruin even the best strategy.

Futures: The Most Standardized High-Leverage Tool

Futures are agreements to buy or sell an asset at a predetermined price at a future date, traded on exchanges with standardized contracts. Common types include:

• Metal futures (gold, silver, aluminum)
• Index futures (Dow Jones, S&P 500, NASDAQ, Hang Seng)
• Agricultural futures (wheat, soybeans, cotton)
• Energy futures (oil, natural gas, coal)

Futures typically offer leverage of 10-20x, with relatively low trading costs. However, futures have settlement dates; positions must be rolled over or closed before expiry, and settlement prices may differ from spot prices, introducing unpredictable risks.

Options: Limited Risk Leverage

Options give the right, but not obligation, to buy or sell an asset at a specific price within a certain period. The maximum loss is limited to the premium paid, preventing liquidation. Compared to futures, options are more suitable for risk-averse investors. However, options pricing is complex and requires professional knowledge.

Leveraged ETFs: Convenient but Costly

Leveraged ETFs offer 2x, inverse 1x, and other leverage options, suitable for active short-term traders. But their trading costs are 10-15 times higher than futures, and long-term holding erodes returns due to fees. They perform poorly in volatile markets and are best for short-term trend trading.

Contracts for Difference (CFD): Most Flexible Leverage

CFDs allow traders to speculate on global assets—stocks, metals, commodities, indices, forex, cryptocurrencies—using margin, without owning the underlying assets. Advantages include flexible leverage (e.g., 5x, 10x, 20x), no settlement date, and easy trading. The downside is varying platform rules; choose reputable providers carefully.

Self-Discipline in High Leverage Trading: Risk Management Is Key

No matter which high-leverage tool you choose, the following principles are essential:

1. Start with low leverage Don’t jump straight into 20x or 25x. Begin with 3-5x to familiarize yourself with trading and risk management. Satto’s mistake was using 25x leverage without sufficient experience.

2. Set stop-loss points This is the most critical safeguard. Decide your maximum loss before entering a trade, and close the position when reached. Many traders hope for a rebound and refuse to cut losses, ending up completely wiped out.

3. Maintain sufficient margin reserves High leverage requires ample margin buffers for market swings. It’s recommended to keep at least 30-50% cash as a cushion to avoid forced liquidation during sudden volatility.

4. Trade only what you understand Don’t leverage heavily on assets you don’t fully research. Understand the fundamentals, technicals, and risks to make more accurate decisions.

5. Avoid overconfidence The most dangerous mindset in high-leverage trading is “I’m sure the market will do this.” Markets are inherently uncertain; always stay humble.

Conclusion

Renowned financial author Robert Kiyosaki once said that moderate leverage can increase returns, but the key is how to use borrowed money wisely to build real wealth. High leverage itself isn’t evil; it depends on the user’s literacy.

If your high-leverage operations aim to boost returns within a strict risk management framework, it can be a powerful tool. But if you gamble, avoid stop-losses, and go all-in, high leverage becomes a destructive weapon.

Remember: Always start with low leverage, always set stop-losses, never view high leverage as a shortcut to wealth. The market is ruthless, but proper risk management can help you survive longer.