Your Secret Weapon - Leverage (Don't Freak Out)

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By Connor
Estimated reading: 6mins
Leverage

Ok, real talk, people are way too scared of leverage.

Sure, you can get REKT from it, but there are different types of leverage and better and worse ways to use them.

Not to mention, nearly every single rich person in the world is using it in one form or another.

To understand what I am talking about, let’s first define leverage.

What is Leverage?

Leverage is a financial term used to describe the use of borrowed funds or debt to increase the potential return on an investment or to amplify the impact of a financial transaction. 

It involves using a relatively small amount of capital (your own money) and borrowing a larger amount of money to make an investment or engage in a business activity. 

The goal of leverage is to magnify gains if the investment performs well.

Leverage can be applied in various ways, including:

  • Financial Leverage: This involves borrowing money, often through loans or issuing bonds, to invest in assets or projects that have the potential to generate higher returns than the cost of borrowing. If the return on investment exceeds the interest and other costs of borrowing, it can lead to increased profits for the investor.
  • Operational Leverage: Operational leverage refers to the use of fixed costs in a company's operations. When a company has high fixed costs, it means that a significant portion of its expenses doesn't change with changes in production or sales volume. If the company can increase its sales or production, it can enjoy greater profits due to the leverage of those fixed costs.
  • Leveraged Investments: Some financial products and investment strategies allow individuals and institutions to magnify their exposure to the financial markets. For example, trading on margin allows investors to borrow funds to buy more securities than they could with their own capital. While this can lead to higher potential returns, it also comes with higher risk, as losses can be magnified as well.

Real Estate Investors Use Leverage

Real estate investors use leverage by borrowing money to finance the purchase of properties. This allows them to control more real estate with a relatively smaller amount of their own capital. Here's how real estate investors typically use leverage:

  • Mortgages: The most common form of leverage in real estate is obtaining a mortgage loan from a bank or other lending institution to purchase a property. The investor provides a down payment, typically a percentage of the property's purchase price (e.g., 20%), and borrows the remaining amount from the lender. The property itself serves as collateral for the loan. This allows investors to acquire properties that they might not be able to afford with their own cash alone.
  • Leveraging Equity: Experienced investors may also use the equity built up in their existing properties to finance the purchase of new ones. They can either take out a home equity loan or refinance an existing property to access the equity as cash, which can then be used as a down payment for another property. This approach is known as "leveraging equity.”

Bitcoin and Altcoins are Leverage

You can also think of Bitcoin and Altcoins as a form of leverage.

That is, Bitcoin being a risk-on asset that outperforms the stock market in a bull market and underperforms the stock market in a bear market, historically.

And for altcoins, SOME of them overperform Bitcoin in a bull market and underperform it in the bear market, historically.

Bad Ways to Use Leverage

There are many ways to use leverage to your advantage, but there are also ways to use leverage to your disadvantage.

Magnifying the Houses Advantage Against You. When you use leverage on a centralized crypto exchange or with a broker, it is set up in such a way that increases profit for them while increasing risk for you. For example, if you take 5x leverage and make a profit, you both get 5x the returns. However, if you lose money you take 100% of the losses. In addition, leverage increases your risk of losing the collateral that you put up in order to get the leverage.

Full Liquidations. Typically, in order to gain access to leverage you must put up collateral or margin. If your speculation turns against you, you may not only lose your leverage but also your collateral. For example, if you want to buy $10,000 worth of a stock on margin and the margin requirement is 50%, you would need to provide $5,000 as collateral. If your investment moves to the downside to a price point specified by the lender, your entire position could be liquidated. Contrast this with Liquid Loans, where if your vault gets liquidated, you still keep your USDL.

How To Best Leverage Liquid Loans

As always, nothing here is financial advice. Everything is intended for educational purposes only. 

There are two ways to leverage Liquid Loans in a fairly responsible manner.

The first way is to use the minted USDL to earn yield. The safest way to do this is via the Stability Pool. Stability Providers earn yield in both PLS and LOAN token in the Stability Pool and they can withdraw their USDL at any time to pay back their debt. 

This leaves their chances of liquidation very low if they are attentive to price fluctuations in PLS. And even if they are liquidated, it is not a full liquidation because they keep their USDL.

The second and more risky way is to use USDL to buy more PLS or another risk on PulseChain asset like the LOAN token or PLSX. This provides additional risk-on price exposure but amplifies the overall risk of downside price action.

How To Degen With Liquid Loans (Not Advisable)

Again, none of this is financial advice. We are just presented different use cases for the Liquid Loans code.

The LL protocol offers the ability to take out significant leverage on PLS.

For example, they can take 11,000 USD worth of PLS and mint 10,000 USDL (Note: this is extremely risky and is the minimum collateral ratio)

Then can then take that 10,000 USDL and buy 10,000 USD worth of PLS. Then you can mint 9090 USDL from that new PLS. You can do infinite iterations of this leverage strategy and gain over 10x leverage.

The risk in this, of course, is that the price of PLS goes down by a fraction of a cent and your vault liquidates under 110% collateral ratio.

To be safer, and more realistic, you can perform this exact leverage strategy but maintain a collateral ratio between 200-250% the entire time.

The Bottom Line

Leverage is a scary word for many investors.

But the fact of the matter is that leverage is used by almost every wealthy person on the planet. 

Learn how to use leverage responsibly inside and outside of the Liquid Loans protocol to help grow your wealth and differentiate good strategies from the ones that will leave you with zero.

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor

Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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