Understanding the risks of liquidation in margins: cryptocurrency precautionary guide
The growth of cryptocurrencies has created a new trade age, with many investors flowing on platforms such as Coinbase, Binance and Kraken to buy, sell and traded digital assets. Although the potential reward for investment in cryptocurrencies is notable, this world also has a darker side: Margin’s trade.
Mark trafficking means borrowing money from a broker or exchange to increase your trading size, allowing you to take more risks and potentially earn a higher return. However, this is also the case with a steep price tag: if your position is in conflict with you, your account elimination can be devastating.
In this article, we will go into the world of marginal trade, studying the risks of liquidation and how to reduce them in cryptocurrency.
What is edge trade?
Mark’s trade allows you to sell larger amounts of cryptocurrency than you could otherwise afford. This is achieved through borrowed money from brokers or stock exchanges, which are then used to finance your transactions. Margin’s trading idea is that if your position is against you, the lender will cover part of your loss.
For example, let’s pay $ 10,000 in a backup account and buy $ 5,000 value Bitcoin with a exchange rate of $ 1 = 3 btc. Your account balance should be:
- Initial Deposit: $ 10,000
- Borrowed funds (from the lender): 0 USD (because we didn’t get money)
- Available for trade balance: $ 10,000
Risk of liquidation
Liquidation occurs if your edge position is considered too high to maintain it. In cryptocurrencies this can happen when:
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Price movement is against you : If your cryptocurrency price drops, you may not be able to sell at a favorable price, leaving you excessive position.
- Position size exceeds available funds : If you are trying to close a long or short position that is too large for your account balance, the stock exchange will eliminate your position and remove the funds from your account.
If your position is eliminated, the funds will be returned to Bitcoin, but with penalties and interest. For example:
- If you sell 1 BTC with a exchange rate of $ 10 = 3 btc, you will be left for $ 2000.
- Exchange will deduct 50% penalty for your initial investment (for example, from $ 10,000 to $ 5,000) as well as interest.
CRIPTATURE RISK REDUCTION
While liquidation can be devastating, there are ways to reduce its effects:
- Diversify your portfolio : Spread investment in several cryptocurrencies and assets classes to reduce exposure.
- Set stop loss orders : Make automatic sales orders to limit the loss if you lose money for some position.
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Use Risk Restriction Strategies : Before making trade, use options, fouling or other derivatives to lock prices.
- Close the account balance : Regularly review your positions and adjust as needed to avoid liquidation.
Best practice for cryptocurrency margins for trade
In the trade boundary accounts, follow this best practice:
- Start with low -tied funds : Don’t risk more than 5-10 times the amount you can afford to lose.
- Keep the railing account size small
: The goal is to balance $ 5,000 to $ 20,000 or less.
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Use reputable exchange and brokers : Explore and select well -designed platforms that offer safe and reliable trade services.
- Stay informed and patient : Continuously monitor market trends and adjust your strategy as needed.
Conclusion
While Margin’s trade can be an exciting way to invest in cryptocurrencies, it is important to understand the risks associated with liquidation.
