Financial Leverage in Derivatives – Tool for Wealth or Ticket to Economic Hell?
Leverage is the dream of every speculator striving to "make a fortune" with minimal investment. But like any double-edged sword, it can either open the gates to wealth or mercilessly plunge the naïve into a pit of losses and depression. For some, leverage is a mechanism of refined enrichment. For others – it's a game of fire, where the winners are rarely those who scream, "I know I'll be lucky!"
Today, we’ll explore how leverage helps professionals profit from the markets and how misuse turns traders into cautionary tales. If you think it's all about luck (or naive self-confidence), this article is for you. As Arthur Wellesley said, "Luck favors the prepared."
A Brief History of Leverage
Leverage is not a modern invention. Even in ancient times, it captivated minds dreaming of getting something for nothing. Take Thales of Miletus, who essentially invented the option. He paid a small sum to reserve olive presses, anticipating a good harvest. Smart move? Sure. Fortunately for Thales, margin calls didn’t exist back then, or his story might’ve ended differently.
In the Middle Ages, merchants negotiated forward contracts on spices and grain — a way to "spend less, gain more." At least they knew the price of their risks. Some modern traders, however, are so obsessed with tomorrow’s riches that they forget leverage doesn’t forgive mistakes.
Fast-forward to 17th century Amsterdam: tulip mania. One trader put all his savings into tulip futures, hoping prices would soar. They crashed. Debt soared. Wealth vanished. All he had left was a tulip bulb — a monument to his "brilliant" get-rich scheme.
In 19th-century America, farmers and traders used futures to hedge against price risk. Yet even then, some saw leverage as a shortcut to riches — until their margin calls reminded them otherwise.
Then came the Great Depression. People borrowed to buy stocks, then used leverage to buy more. What could go wrong? Everything. When markets collapsed, speculators were left broke — and deep in debt.
Even professionalism didn't prevent disasters. Consider LTCM, a hedge fund run by Nobel laureates. Sounds bulletproof, right? But their overuse of leverage almost tanked the global financial system.
Modern Derivatives and the Lure of Leverage
Options are a beginner's fantasy: “Pay $1,000 to control $100,000 worth of assets!” What they don’t say: if the underlying asset doesn’t move your way, your $1,000 becomes $0 fast. If it moves in your direction but not far or fast enough — same result, just slower.
Futures let you control large positions with small investments. Buy 1 ETH at $3,600 with only $36? Sounds like a crypto mogul’s dream. But if ETH drops to $3,000, the broker demands more funds — or closes your position at a loss.
On some crypto exchanges, leverage of 100:1 is offered. For whom? Probably for self-proclaimed trading geniuses. In reality, it draws crowds of hopefuls who open trades without understanding the risks. The result is predictable: a 1% price move against you, and your funds vanish.
Exchanges offering 100:1 leverage aren’t naive. They're run by cold-blooded professionals. And their “insurance funds” — allegedly in the billions — are often backed by vague local evaluations of imaginary assets.
Leverage: Pros and Cons
Pros (for professionals):
Cons (for everyone else):
Final Thoughts
Leverage is a tool for professionals — and a trap for the uninformed. If you want to star in a story called “How I Lost Everything in a Day,” high-leverage derivatives are your path. But if you truly want to use leverage smartly, study risk management and strategies deeply.
Remember: in finance, there are only two types of people — those who understand how markets work, and those who feed the market with their money.
A Note on Deribit’s Leverage Policy
Let’s briefly touch on the leverage used on the Deribit exchange. Their margining and risk engine is one of the best I’ve seen in the industry.
Deribit’s risk parameters — surprisingly — are public. For major crypto derivatives, the provided leverage is around 5:1 (100/20 = 5).
Today, we’ll explore how leverage helps professionals profit from the markets and how misuse turns traders into cautionary tales. If you think it's all about luck (or naive self-confidence), this article is for you. As Arthur Wellesley said, "Luck favors the prepared."
A Brief History of Leverage
Leverage is not a modern invention. Even in ancient times, it captivated minds dreaming of getting something for nothing. Take Thales of Miletus, who essentially invented the option. He paid a small sum to reserve olive presses, anticipating a good harvest. Smart move? Sure. Fortunately for Thales, margin calls didn’t exist back then, or his story might’ve ended differently.
In the Middle Ages, merchants negotiated forward contracts on spices and grain — a way to "spend less, gain more." At least they knew the price of their risks. Some modern traders, however, are so obsessed with tomorrow’s riches that they forget leverage doesn’t forgive mistakes.
Fast-forward to 17th century Amsterdam: tulip mania. One trader put all his savings into tulip futures, hoping prices would soar. They crashed. Debt soared. Wealth vanished. All he had left was a tulip bulb — a monument to his "brilliant" get-rich scheme.
In 19th-century America, farmers and traders used futures to hedge against price risk. Yet even then, some saw leverage as a shortcut to riches — until their margin calls reminded them otherwise.
Then came the Great Depression. People borrowed to buy stocks, then used leverage to buy more. What could go wrong? Everything. When markets collapsed, speculators were left broke — and deep in debt.
Even professionalism didn't prevent disasters. Consider LTCM, a hedge fund run by Nobel laureates. Sounds bulletproof, right? But their overuse of leverage almost tanked the global financial system.
Modern Derivatives and the Lure of Leverage
Options are a beginner's fantasy: “Pay $1,000 to control $100,000 worth of assets!” What they don’t say: if the underlying asset doesn’t move your way, your $1,000 becomes $0 fast. If it moves in your direction but not far or fast enough — same result, just slower.
Futures let you control large positions with small investments. Buy 1 ETH at $3,600 with only $36? Sounds like a crypto mogul’s dream. But if ETH drops to $3,000, the broker demands more funds — or closes your position at a loss.
On some crypto exchanges, leverage of 100:1 is offered. For whom? Probably for self-proclaimed trading geniuses. In reality, it draws crowds of hopefuls who open trades without understanding the risks. The result is predictable: a 1% price move against you, and your funds vanish.
Exchanges offering 100:1 leverage aren’t naive. They're run by cold-blooded professionals. And their “insurance funds” — allegedly in the billions — are often backed by vague local evaluations of imaginary assets.
Leverage: Pros and Cons
Pros (for professionals):
- Fast profit: If used wisely, leverage can multiply capital.
- Accessibility: Small investors can access big trades (often to their regret).
- Hedging: Companies hedge risks — but this isn’t for retail get-rich-quick traders.
Cons (for everyone else):
- Huge risk: You can lose everything in minutes — especially if you’re trading with borrowed funds.
- Emotional pressure: Watching your deposit evaporate isn’t for the faint-hearted.
- Systemic risk: When too many "geniuses" leverage up, we get crises like 1929 or 2008.
Final Thoughts
Leverage is a tool for professionals — and a trap for the uninformed. If you want to star in a story called “How I Lost Everything in a Day,” high-leverage derivatives are your path. But if you truly want to use leverage smartly, study risk management and strategies deeply.
Remember: in finance, there are only two types of people — those who understand how markets work, and those who feed the market with their money.
A Note on Deribit’s Leverage Policy
Let’s briefly touch on the leverage used on the Deribit exchange. Their margining and risk engine is one of the best I’ve seen in the industry.
Deribit’s risk parameters — surprisingly — are public. For major crypto derivatives, the provided leverage is around 5:1 (100/20 = 5).
Luuk Strijers
Deribit CEO
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