Leverage in the cryptocurrency sector was one of the reasons for the recent market shakeup, said BlackRock CEO Larry Fink in an interview with CNBC. In his view, the excess of borrowed positions in digital assets has left the market, and at current levels the situation looks more stable.
In Brief
- Larry Fink said that excessive financial leverage in Bitcoin and other crypto assets led to a market cleanup.
- According to the BlackRock CEO, after the overheating subsided, current levels look more stable.
- Fink also expects the emergence of markets for investing in computing power and called this a possible new revolution in finance.
What Larry Fink Said About the Crypto Market
Answering a question about leveraged positions in the markets, Larry Fink focused specifically on cryptocurrencies. His main point was that overheated leveraged trades made the market more vulnerable, and the subsequent correction removed a significant portion of the excess risk.
“I have always been concerned about leverage in Bitcoin and cryptocurrencies. There were too many players using borrowed funds, so the market went through a cleanup. I think at current levels there is already more stability here,” said Larry Fink.
According to him, cryptocurrency was not the only topic in the conversation about risks. At the same time, Fink emphasized that overall he does not see such a volume of hidden leverage in the capital markets that could be compared to the 2008-2009 period.
Fink was not talking about a specific asset on the balance sheet or the balance sheet of a particular investor, but about the systemic impact of leveraged positions. In such an environment, financial leverage can quickly amplify both growth and decline, especially when margin trading becomes widespread.
How Leverage Works in Cryptocurrency
Leverage allows you to open a position larger than your own capital: the trader provides collateral, and the rest of the position is actually formed at the expense of the platform’s borrowed funds. This mechanism is most often used in margin trading and on derivatives markets, including futures.
The basic formula is simple: position size = own funds × leverage. If a trader has $100 and uses 10x leverage, the position size will be $1,000. If the price moves 5% in the desired direction, the profit on such a position will be about $50, and if it moves 5% against the position, the loss will also be about $50, not including fees and other expenses.
The main advantage of leverage is the ability to open a larger position with a small amount of capital and increase potential profits. But the same mechanism also increases losses: the cryptocurrency market is volatile, so the price can quickly move a distance that would not be critical for a position without leverage.
You can trade with leverage on crypto exchanges and derivatives platforms where margin trading, futures, or other collateralized instruments are available. Compared to traditional markets, the crypto market usually moves faster, trades around the clock, and more often experiences sharp liquidity swings, so the risks of leverage are felt more strongly here.
Main Risks of Leverage and How to Reduce Them
For beginners, it is safer to start with the minimum available leverage or not use it at all until you have experience managing a position. Low leverage gives more room for price fluctuations and reduces the chance that normal market volatility will quickly lead to a large loss.
- Liquidation: forced closing of a position when the loss on the trade eats up the collateral and it falls below the required margin level.
- Rapid growth of losses: the higher the leverage, the more even a small price movement affects the outcome of the trade.
- Volatility: sharp market movements can knock out a position before the trader has time to react.
- Risk of losing more than the initial deposit: this is possible with sharp price gaps, insufficient collateral, borrowed funds, and additional obligations on the position.
Simple rules help reduce the risk of liquidation: do not take too high leverage, set stop-losses in advance, limit position size, keep a margin reserve, do not open all trades in one direction, and do not enter the market with all your capital. The smaller the share of one trade in the deposit, the easier it is to survive a sharp price movement without forced closing of the position.
Demand for Computing Power Is Growing Faster Than Supply
A separate part of the interview was devoted to the race for artificial intelligence. Fink believes that the capital expenditures of the six largest technology companies at the level of $1 trillion still do not cover the scale of future demand.
In his view, the need for computing is not slowing down, but rather accelerating. The main concern of industry participants now is that supply is not keeping up with demand. This is already reflected, in particular, in the share prices of memory manufacturers.
BlackRock itself is actively working in this area and remains a major investor in data centers. In the last quarter, the company contracted almost 1 GW of electricity in Pennsylvania and is financing another large data center in another state.
“We will get markets for investing in computing power. A futures market will appear. This will be the next revolution in finance,” said Larry Fink.
Main Risk for AI Is Energy and Computing Availability
Fink sees the problem not so much in a possible bubble or in a lack of demand. He is more concerned about whether society will be able to get real benefits from artificial intelligence if computing remains too expensive. According to him, it is now difficult for small and medium-sized businesses to compete in such an environment.
The second challenge is energy. The BlackRock CEO believes that the US is not investing fast enough in power grids and is not providing the necessary volume of electricity supply. Against this backdrop, China, he says, is building 100 GW of nuclear and almost 100 GW of solar generation, preparing for a new phase of AI development.
Fink believes that the US should take a pragmatic approach to energy and not tie itself to a single source. In his logic, the result is important: the country needs sufficient volumes of electricity, regardless of whether they come from solar plants or hydrocarbons.
Earlier, BlackRock also named the optimal share of Bitcoin in an investment portfolio.
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