The Abyss of Leverage: Summary of a Report on In-depth Behavioral and Financial Pathology on the Destruction Process of Individual Speculators under the "519" Extreme Market
This report aims to conduct a panoramic review of the devastating experience of a typical retail speculator (codename "Chen") in the "519" cryptocurrency market crash in 2021, and provide an in-depth analysis of the behavioral finance fallacies in high-leverage cryptocurrency trading, exchange microstructure risks, and the evolving mechanism of gambler psychology. This study is not only a financial analysis of asset liquidation, but also a sociological archive of how human nature is swallowed up by algorithms, leverage, and neurochemical reactions under extreme volatility. The report is about 15,000 words in length. Through a combination of narrative case reconstruction and technical theoretical analysis, it demonstrates in detail how high leverage can push an ordinary middle-class technician to a double financial and mental collapse.
Contents Introduction: Liquidity Feast and the Desire for Escape in the Era of Involution 1.1 Macro Background: Madness and “Animal Spirits” in 2021 1.2 Hotbed of Speculators: Why Cryptocurrency? 1.3 The "coolness" effect: Survivor bias and the poison of the myth of wealth creation Chapter 1: Sample portraits and environmental psychology analysis 2.1 Subject profile: Chen – a stranger floating in Tokyo 2.2 Stress test of the physical environment: sound insulation, tram noise and claustrophobic space 2.3 Alcohol as a catalyst: "Strong Zero" and impaired cognitive function Chapter 2: Fatal flaws of the trading system – technology and mechanism 3.1 Perpetual contract (Perpetual) Swaps) temptations and traps 3.2 The mathematical tyranny of leverage: What does 100 times mean? 3.3 Cross and Isolated: Wrong Risk Management Choices Chapter 3: The Construction of the Trap—The Calm Before the Storm (May 1-18, 2021) 4.1 Animal Coin Frenzy and the Accumulation of FOMO (Fear of Missing Out) 4.2 Musk’s Tweets and Regulatory Black Swans: Reversal of Market Sentiment 4.3 Behavioral analysis of the logic of "buying the dip": Disposition effect and confirmation bias Chapter 4: The night of 519 – microscopic recurrence of systemic collapse (timeline review) 5.1 Prelude (20:00 JST): The color of the K-line and cultural cognitive dissonance 5.2 Acceleration (21:30 JST): Breaking through the psychological defense line 5.3 Dark hour (22:00-23:00 JST): Exchange downtime and liquidity black hole 5.4 Data Forensics: Benford’s Law Anomaly and the Suspicion of Exchange “Unplugging” Chapter 5: Liquidation – Algorithm Execution and Psychological Death 6.1 The Working Principle of the Liquidation Engine 6.2 That Email: The Embodiment of the Disappearance of Digital Wealth 6.3 Physiological Reactions: Acute Stress Disorder (ASD) and Cortisol Storm Chapter 6: Aftermath – Revenge Trading and Total Destruction 7.1 The Ultimate Form of the Gambler’s Fallacy: Lending and "Recovering Capital" Obsession 7.2 Echoes of social media: Despair and carnival on Weibo 7.3 Ending: The demise of a social existence Conclusion and reflection: The system always wins
Introduction: Liquidity Feast and the Desire for Escape in the Era of Involution 1.1 Macro Background: Madness and “Animal Spirits” in 2021
In the spring of 2021, the global financial market is in an almost hallucinogenic state of excitement. The unlimited liquidity released by the Federal Reserve after the epidemic poured into various asset classes like a flood, and the cryptocurrency market became the most turbulent place for this torrent. Bitcoin broke through an all-time high of $64,000 in April, and Ethereum followed suit by hitting the $4,000 mark.
This is a special moment for the younger generation in East Asian cultural circles. The traditional upward channel is becoming increasingly narrow, and "involution" has become a popular term to describe the fierce competition in society and diminishing returns. Cryptocurrency, with its decentralization, borderlessness and extremely exaggerated volatility, is regarded by many young people as the only elevator to break class solidification and achieve a "class jump". In this context, leverage trading is no longer just a financial tool, it has been given a certain rebellious and heroic color.
1.2 A hotbed for speculators: Why cryptocurrencies?
Unlike the traditional stock market, the cryptocurrency market is a 24/7 casino that never sleeps. This round-the-clock nature deprives traders of a window of time for calm thinking, leaving the dopamine reward circuit in a state of constant overload. For our protagonist, Chen, this nonstop beating K-line is both a source of anxiety and the fuel of life.
1.3 “Cool” Effect: Survivor Bias and the Poison of the Wealth Creation Myth
Before Chen's story begins, it is necessary to mention a spiritual totem that had a devastating impact on him-"Liang Xi". This 17-year-old boy used extremely high leverage to turn a few thousand yuan into tens of millions of yuan in a short period of time during the 2021 market boom.
Liang Xi's story went viral on Weibo and WeChat groups, and he became the "god" in the hearts of all gamblers. Although Liangxi eventually took on huge debts due to liquidation, in that crazy May before May 19, Chen only saw the first half of the story: high leverage is the shortcut to freedom. This extreme survivor bias makes Chen subconsciously believe that as long as he has good skills and courage, he can become the next "Liang Xi". He ignored the most basic mathematical probability – in a game with negative expected value, bankruptcy is the only end point of convergence.
Chapter 1: Sample portraits and environmental psychology analysis 2.1 Subject file: Chen – a stranger floating in Tokyo
Chen is a typical "poor and busy family in Kochi". He graduated from a good domestic science and engineering university and later came to Tokyo through labor dispatch to work in IT outsourcing. Although he is called an "engineer", he actually earns a subsistence salary and does repetitive code transfer work. In the high-pressure city of Tokyo, he felt deeply lonely and alienated. He has no Japanese friends and is unwilling to integrate into the local society. His only social activities are browsing Weibo, reading Twitter, and speculating in coins after get off work.
2.2 Stress test of physical environment: sound insulation, tram sound and claustrophobic space
The apartment Chen rents is a typical Showa-era building with a wooden structure and walls as thin as paper. This is not uncommon in Tokyo, where land is at a premium, but for a full-time trader who requires a lot of concentration (even though he has to work during the day), it's hell.
Every night, the coughing sound of the neighbor next door, the sound of the TV, and even the sound of electricity turning on and off the lights can be clearly heard. To make matters worse, the apartment is less than 50 meters away from the Chuo Line tracks. Every few minutes, a train would roar past, causing subtle vibrations throughout the room. This kind of continuous low-frequency noise and vibration has long kept Chen in a sub-healthy physical and mental state. His sleep quality is extremely poor, his nerves are extremely sensitive, and he is easily irritable.
In the week before 519, Chen barely slept in order to keep track of the market. He shut himself in this claustrophobic space of only 15 square meters, closed the curtains, and cut off the natural light from the outside world. The room was filled with the greasy smell of take-out lunch boxes, the smell of sweat from unwashed clothes, and the lingering smell of alcohol.
2.3 Alcohol as a Catalyst: “Strong Zero” and Impaired Cognitive Function
To combat anxiety and insomnia, Chen developed a deadly habit: drinking Strong Zero.
This is a canned cocktail (Chūhai) that can be seen everywhere in Japanese convenience stores. It is famous for its "9% high alcohol content" and "zero sugar". It is cheap (a can is less than 150 yen), tastes as smooth as juice, but has great staying power. It is nicknamed "water of nothingness" or "fragmented wine" by Japanese netizens.
Late at night in trading, when fear strikes, Chen will open a can of lemon-flavored Strong Zero. The temporary paralysis caused by alcohol made him feel that he was omnipotent. The fluctuations on the K-line no longer frightened him, but instead gave him the illusion of controlling the overall situation. However, neuroscience research shows that alcohol severely inhibits the function of the prefrontal cortex, the area of the brain responsible for rational decision-making, risk control, and impulse suppression.
Under the dual effects of alcohol and sleep deprivation, Chen's brain had degenerated into a primitive machine powered by the amygdala. He is no longer "trading", he is looking for excitement.
Chapter 2: Fatal Flaws of the Trading System—Technology and Mechanism
To understand how Chen lost all his savings and went into huge debt overnight, we must deeply analyze the financial instrument he used—Bitcoin Perpetual Futures.
3.1 The temptation and trap of perpetual contracts (Perpetual Swaps)
Perpetual contracts are the greatest “invention” of the cryptocurrency market and the sharpest sickle. Unlike traditional futures, there is no delivery date. This means that as long as you don't liquidate your position, you can hold it forever. This mechanism gives retail investors the illusion that as long as I look in the right direction, I can "carry" the intermediate fluctuations.
3.2 The Mathematical Tyranny of Leverage: What Does 100x Mean?
On the night of 519, Chen opened 100 times leverage.
That's a crazy number. Under 100 times leverage, if the price of the underlying asset (Bitcoin) fluctuates by 1%, Chen's principal will double (+100%) or return to zero (-100%). In fact, it's worse than that. Because the exchange needs to charge transaction fees, and in order to prevent liquidation (the account balance becomes negative), the exchange will set a "maintenance margin rate" (Maintenance Margin), usually around 0.5%. This means that as long as the price fluctuates 0.5% – 0.7% in an unfavorable direction, Chen's position will be forced to be liquidated.
In the cryptocurrency market, a 0.5% fluctuation can occur in a second. This is no longer investing, or even gambling, this is picking up coins on the railroad tracks.
3.3 Cross and Isolated: wrong risk management choices
Another fatal mistake Chen made was choosing the Cross Margin model.
Chen's logic for choosing a full position is a typical retail investor's thinking: "I'm afraid of being liquidated, so I have to use all my money to cover the order. Bitcoin can't keep falling. As long as I have enough money, I can carry it until it rebounds." This kind of thinking ignores the destructive power of black swan events. Under the full position mode, once an extreme unilateral market situation like 519 is encountered, the outcome will not only be a stop loss, but also a complete loss of money.
Chapter 3: The Construction of the Trap—The Calm Before the Storm (May 1-18, 2021) 4.1 Animal Coin Frenzy and the Accumulation of FOMO (Fear of Missing Out)
At the beginning of May 2021, the protagonists of the market are Dogecoin and Shiba Inu Coin (SHIB). Chen watched helplessly as these "air coins" without any value support increased more than ten times or even dozens of times in a few days. His colleagues and the bloggers he follows on Weibo all seem to be making money.
“I missed Doge, I missed Shib, I can’t miss the next major rise in Bitcoin.”
This strong FOMO (Fear Of Missing Out) mentality completely destroyed his sense of risk. He felt that the market owed him a chance to get rich.
4.2 Musk’s tweets and regulatory black swan: reversal of market sentiment
On May 12, Tesla CEO Elon Musk suddenly announced that Tesla would suspend accepting Bitcoin payments due to environmental concerns. The market fell in response. On May 18, the China Internet Finance Association and three other associations jointly issued an announcement to prevent the risks of speculation in virtual currency transactions. This is a clear regulatory bearish signal.
However, at this time, Chen had already fallen into cognitive dissonance. He refuses to believe the bull market is over. He believes that these are "FUD" (panic news) and are smoke bombs released by bookmakers in order to defraud retail investors of their chips.
4.3 Behavioral analysis of the logic of “buying the dip”: disposition effect and confirmation bias
On the evening of May 18, Bitcoin fell to around $42,000. Chen believes this is a once-in-a-lifetime opportunity to “buy the dip.” Not only did he not reduce his position, but he added to his long position at this position. He converted all the money he cashed out from his credit card and the money he originally planned to send home into USDT and transferred it to his Binance contract account.
He looked at the 100 times leverage ratio on the screen, his hands trembling slightly, but he told himself: "Wealth can be found through risk. This is what Liang Xi does." At this time, the average price of his positions was around US$43,500, and the liquidation price was displayed at US$35,000 under the protection of the full position mode. "It's impossible for Bitcoin to fall below 35,000," he said to himself as he took a sip of Strong Zero and looked at the screen. "That was the top of the last bull market, and the support is very strong."
What he didn't know was that Death was already standing outside the door.
Chapter 4: The Night of May 19th – Microscopic Reappearance of Systemic Collapse (Timeline Review) 5.1 Prelude (20:00 JST): The Color of the K-Line and the Cognitive Dissonance of Culture
May 19, 2021, 8 pm Tokyo time. When Chen came home from get off work, he didn't even take a shower and just slumped down in front of the computer. The room was unbearably hot, and the early summer in Tokyo was already a bit humid. He opened an ice-cold can of Strong Zero (grapefruit flavor).
On the screen, the price of Bitcoin is hovering near $39,000. Here is a detail: Although Chen is Chinese, in order to appear "professional", he uses the default color scheme of the international version of TradingView – green up and red down. However, the tradition of China's stock market is that it rises in red and falls in green. Under the influence of extreme fatigue and alcohol, this counter-intuitive setting of colors increased the cognitive load on his brain.
Whenever a red K-line (falling) appears, his subconscious takes 0.1 seconds longer to reflect that this is a "bad thing". This tiny delay became a fatal liability over the next few hours.
5.2 Acceleration (21:30 JST): Breaking through psychological defenses
At 9:30 p.m., U.S. stocks opened. Instead of rebounding as Chen expected, the market began to fall at an accelerated pace. Bitcoin falls below 38,000. The floating losses in Chen's account began to expand. The Margin Ratio has changed from the green safety zone to the yellow warning zone.
The phone vibrated. ** Margin Call:** "Your margin balance is low…" This is a margin call notification email.
Chen's palms began to sweat. He quickly opened Alipay and WeChat to check if he had any spare money to deposit. there is none left. The credit card is maxed out, and the borrowed money is empty. "It's okay, it's still early for 35,000." He comforted himself.
5.3 Dark Hour (22:00-23:00 JST): Exchange Outage and Liquidity Black Hole
At 10pm (13:00 UTC) the real crash began. The price of Bitcoin no longer fluctuates downwards, but falls vertically like a waterfall. 37,000… 36,000… 35,000…
Chen's psychological defense collapsed the moment 35,000 was penetrated. "The position must be closed! The loss must be stopped!" He clicked the mouse frantically, trying to click the "Close Position" button on the mobile app.
Spin in circles. Infinite circles. The line of words that made him despair popped up on the screen: "Network Request Failed" or "System Busy".
This is the darkest scene in the May 19 tragedy: the exchange pulled out the network cable. Due to the influx of massive sell orders and liquidation requests in a short period of time, the matching engines of leading exchanges such as Binance were overwhelmed and the API interfaces were paralyzed. This means that retail investors are watching their money burn, but they are unable to operate, escape, or even recharge their margins. They were locked in the burning house.
Chen refreshed the web page frantically, and the F5 key was almost broken. On the mobile app, the price is stuck at $34,502. But on Twitter, someone sent a screenshot of a Bloomberg terminal: BTC has fallen below $31,000.
This information asymmetry made Chen feel suffocated. He stood up and paced back and forth in the narrow room, his heart beating violently as if it was about to burst through his chest. The neighbor next door knocked on the wall again because he thought his footsteps were too noisy. Chen roared at the wall: "Go to hell!"
5.4 Data Forensics: Anomalies in Benford’s Law and Suspicions of Exchanges “Unplugging Network Cables”
Later academic research showed that Binance’s data between 13:00 and 15:00 UTC on the night of May 19 had serious deficiencies and anomalies. Using Benford's Law analysis, researchers found that the data later filled in by the exchange may not have been generated by real transactions, but were manipulated or forged in order to conceal the fact that the matching engine collapsed and the resulting loss of the Insurance Fund (Insurance Fund).
For Chen, this meant he was playing against a black box. The K-line he saw may not be real, but the money he lost was real.
Chapter 5: Liquidation – Algorithm Execution and Psychological Death 6.1 How the Liquidation Engine works
When the price of Bitcoin fell below $33,000, although Chen’s screen was still stuck, Binance’s internal liquidation engine had taken over his account.
In the cross position mode, the system detected that his margin rate was lower than the maintenance margin rate. In order to protect the exchange from losing money, the engine will forcefully sell all the Bitcoin contracts he holds at the market price (Market Order). In a plunge when liquidity is exhausted, this kind of market sell order will be executed at an extremely low price (slippage), further depressing the price and causing more people to liquidate their positions. This is the so-called Liquidation Cascade.
6.2 That email: the embodiment of the disappearance of digital wealth
11:05pm (JST). The network was finally restored. Chen refreshed the page with trembling hands.
Account total equity (Total Equity): 0.0000 USDT. It may even be a negative number (but with an insurance fund mechanism, it is usually reset to zero).
Immediately afterwards, the email announcing the death sentence was sent to his mailbox. Even in his dreams, the content of this email would haunt him countless times:
Subject: Liquidation Call
Dear User, Your position has been liquidated. All open orders have been canceled. Symbol: BTCUSDT Type: Liquidation Price: 30,850.00
There is no comfort, no explanation, just cold algorithmic logic. The 3 million yen he had saved while working in Tokyo for three years, plus the 2 million yen in credit card debt, were all wiped out in just two hours.
6.3 Physiological response: acute stress disorder (ASD) and cortisol storm
The moment he saw "0", Chen didn't cry. He felt an extreme sense of dissociation. It was as if the soul had drifted away from the body and was looking at the person sitting in front of the computer on the ceiling. What follows is a violent physiological reaction:
This is the body’s exhaustion response after a massive release of cortisol and adrenaline. His brain chose to temporarily "shut down" because it could not process the huge loss signal.
Chapter 6: Aftermath – Revenge Deal and Total Destruction 7.1 The ultimate form of the gambler’s fallacy: borrowing and the obsession with “getting back money”
If you are a rational investor, you should stop your losses and leave the market at this time and pay off your debt slowly. But Chen was already a gambler. After 519, Bitcoin did rebound. It rebounded from a low of 30,000 to 38,000. For Chen, this is more painful than losing money. "If I don't liquidate my position, I will take it back! Not only do I not lose money, I can also make money!"
This psychological suggestion of "near-miss" is the core driving force of gambling addiction. Over the next month, Chen entered a state of madness. He started taking out online loans and even lied to his parents in China that he wanted to buy a house, defrauding him of tens of thousands of yuan. He started Revenge Trading. This time, he opened the leverage to 125 times. "Since the principal is less, higher leverage must be used to recover the capital."
The results speak for themselves. In the volatile market after 519, the fault tolerance rate of high leverage is zero. His new funds hit zero again within days.
7.2 Echoes of social media: despair and carnival on Weibo
While Chen collapsed alone, a carnival and mourning about May 19 was going on on the Chinese Internet. On Weibo, topics such as #Bitcoin slump# and # warehouse burst became hot searches. Some posted screenshots of losses, some broadcast live on the rooftop (although most of them were jokes), and some were scolding like "Liang Xi".
Chen posted a post on Weibo, with no picture and only a few words: "The trains in Tokyo are too noisy. I want to go home." This Weibo was submerged in countless jokes and lamentations. No one responded, except for a robot selling U (Tether) who commented: "Recycle USDT at high prices, integrity first."
7.3 Ending: Death as a Social Being
Three months later. Chen moved out of his apartment in Shinjuku because he couldn't pay the rent. He moved to a more remote and cheaper area in Saitama Prefecture. His company received collection calls from credit card companies and lending platforms. He resigned, or was persuaded to quit. He did not return home because he was too embarrassed to face his parents. He started working as a manual laborer in Tokyo, delivering food, and traveling through the veins of the city like a ghost.
He deleted Binance and deleted Twitter. But he still buys Strong Zero at convenience stores. Whenever he passes by an electronics store and sees financial news on TV and mentions that Bitcoin has risen or fallen again, his hands still tremble unconsciously. The high-spirited engineer "Chen" died in the 4.5-meter room filled with the smell of alcohol and the sound of trams on the rainy night of May 19, 2021.
Conclusion and Reflection: The system always wins
Chen’s story is not an exception. He is the epitome of hundreds of thousands of liquidated accounts during the 519 incident.
Through an in-depth analysis of this case, we draw the following conclusions:
The inevitability of probability: High leverage (>20x) is mathematically destined to zero because it cannot withstand the standard deviation fluctuations in Brownian motion. Predatory nature of the system: Centralized exchanges (CEX) actually constitute an unfair game for retail investors by providing a full position model, high leverage, and "technical failures" at critical moments. The complicity of the environment: the survivor bias of social media (Ryoxi Mythology), the oppression of the physical environment (narrow spaces in Tokyo), and addictive substances (alcohol), together create a perfect closed loop that turns rational people into gamblers.
In the seemingly decentralized free world of cryptocurrency, retail investors have not gained freedom. Instead, they become sacrifices in a liquid feast. As the old casino proverb goes: "If you sit down for ten minutes and don't know who the fool is, you are the fool."
