Hello everyone, this is Lucky Ali, and here we are going to understand the dangerous momentum loop that we often have seen in the bullish trend. Bull market is really exciting because we see that the price is continuously going up, and people feel like they are smart, but no one knows the behind the scenes. So this is exactly what we need to talk about in this post. It is called the reflexive leverage spiral. It sounds technical and difficult, but it is actually very simple. So let's understand it.
So what is reflexing? It is something that feeds on itself. So when there is a bullish market, the Fear and Greed index changes, and there is greed that we see in that index Which means people believe their price goes up, and their belief Push price even higher, and this is the kind of loop, and that's what we call Reflexive.
Now, let's understand Leverage. It is all about investing borrowed money. For example, you see that the market is just starting the uprand and it is continuously going up, then you borrow money from others. For example, if you have 500 usd you borrow another 2000 Usd and you invest a total of 2500 usd in the market, and it seems great and the smart decision, but in reality, it is not. If the price even dros 5%, you lose $125, and if the price move 5% upside, you earnh $125. And in reality, it sounds very well, But thee is a Two sides to the coin, so understand that.
Now we have understood the reflexive and leverage. Let's understand it with some basic steps. So when the prices start to rise, we see new narratives come ahead, for example, it can be artificial intelligence, it can be Metaverse, and there are many more. eary investor get decent returns, and their success stories on social media get more hype, and that is how the confidence increases.
Now other investors at the leverage because they think that it is safe, and it will always go up, and they also don't want to miss this opportunity. So as I said above, they borrow money to invest. So this particular thing increases demand, and these things happen on a large scale.
Because there is a bull market, it feels safer, but it is actually a psychological trap, and people still get confused. Evn 5% drop can harm you because with this drop, big players can sell more, and it turns out to be A big loss for you. We have seen fake moves many times, and then the market show actual rally. So something like this can happen.
The 2021 bull market, the 1929 stock market crash, and the 2008 Housing bubble are the greatest examples of reflexing leverage spirals. So I hope you understand this concept and save yourself from the disaster. do ot borrow money and invest even in the bull market, so keep this in your mind.
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