Understanding the liquidation risks in margin trading: a warning manual for cryptocurrency
The rise of cryptocurrencies has produced a new era of trade, in which many investors on platforms such as coinbase, bony and octopus flow for sale, sale and acting digital assets. While the potential rewards for investing in cryptocurrencies are considerable, there is also a darker side of the world: Margin trade.
The margin trade includes borrowing money from a broker or an exchange to increase your trade size so that you can take more risk and possibly achieve higher returns. However, it is also associated with a steep price: if your position violates you, the liquidation of your account can be devastating.
In this article we will deal with the world of margin trade, examine the risks of liquidation and how to melt them in cryptocurrencies.
What is the Margin trade?
With margin trade you can exchange larger amounts of a cryptocurrency than you could otherwise afford. This is achieved by the use of borrowed money by brokers or stock exchanges, which are then used to finance their business. The idea behind the Margin trade is that the lender covers part of their losses when their position violates them.
Assuming you pay 10,000 US dollars on a Margin account and buy Bitcoin worth 5,000 USD to an exchange rate of 1 USD = 3 BTC. Your account balance would be:
- First deposit: USD 10,000
- Layed fund (from the lender): $ 0 (since we have not borrowed any money)
- Available credit for trade: USD 10,000
The risks of liquidation
Liquidation occurs when your marginal position is considered too high to maintain it. In the case of cryptocurrencies, this can happen if:
- The price movement is against you : If the price of your cryptocurrency decreases, you may not be able to sell at an affordable price so that you leave a transferable position.
- The position size exceeds the available means : If you try to close a long or short position that is too large for your account balance, the stock exchange liquidates its position and pulls the funds off its account.
When your position is liquidated, the funds in Bitcoin will be returned to you, but with punishments and interest. For example:
- If you sell 1 BTC to an exchange rate of 10 USD = 3 BTC, you have 2,000 US dollars.
- The stock exchange will deduct a 50% penalty for its first investment (e.g. USD USD $ 5,000) plus interest.
Mastive the risks in cryptocurrency
While the liquidation can be devastating, there are ways to reduce their effects:
- Disorses your portfolio : spread your investments on several cryptocurrencies and system classes to minimize exposure.
- Set Stop-LOSS orders : Create automatic sales orders to limit losses if you lose money for a position.
- Use security strategies
: Use options, futures or other derivatives to block the prices before trading.
- Carefully monitor your accounts : Check your positions regularly and adjust them as required to avoid liquidation.
Best practices for margin trading with cryptocurrency
Follow the following provisions when trading Margin accounts:
- Start with low lever : Do not risk more than 5-10 times the amount you can afford to lose.
- Keep your margin accounts Klein
: aim for a remaining amount of $ 5,000 to $ 20,000.
- Use serious stock exchanges and brokers : research and choose well -established platforms that offer safe and reliable trade services.
- Stay informed and patiently : Continuously monitor the market trends and adapt your strategy as required.
Diploma
While the Margin trade can be an exciting way to invest in cryptocurrencies, it is important to understand the risks associated with liquidation.