Understanding the risk of trading with a margin in cryptocurrency
The world of cryptocurrency has experienced rapid growth and adoption over the past decade, and many new investors accumulate on online exchanges to buy, sell and trade digital currencies, such as Bitcoin (BTC), Ethereum (ETH) and others. However, this increase also has a high degree of risk, especially when it comes to trade with a margin.
What is a margin trade?
Margin trade, also known as trade in lever or trade in Futures contracts, consists in borrowing money from exchange or broker for the purchase of securities, goods or other financial instruments, which are usually sold at a higher price than their market value. In the context of cryptocurrency, trade in margins allows investors to potentially take more risk and increase their potential returns, but also increases the risk of significant losses.
risk of margin trading in cryptocurrency
Trade with a margin of cryptocurrencies is associated with a few risk, including:
- Market variability : cryptocurrencies are known for high variability, which means that prices can quickly and unpredictably. When trading with the margin, investors may be more susceptible to these price fluctuations, because they borrowed money to buy assets that can be sold at a higher value.
- Risk of liquidity : If the cryptocurrency market experiences a decrease in liquidity, it may be difficult to buy trade and sellers, which leads to increased prices and potential losses.
- Fees and fees : Trade with margin often contains higher fees and fees compared to other trade methods, such as buying and holding coins or replacing them directly from another platform.
- Adjusting risk : Because the cryptocurrency market is constantly developing, regulatory governments and bodies may impose new rules or restrictions on margin trading that may limit access to investors or increase costs.
impact of margin trade on cryptocurrency prices
When investors trade in cryptocurrencies, they generally bet that the price will increase. This can lead to a situation known as “causing a margin” in which the investor must repay the borrowed money plus interest if the market drops significantly.
For example, if the investor borrows USD 10,000 for the purchase of 100 BTC each 1000 USD per coin, and notices a price drop by 20% to USD 800 per coin, he will still owe USD 10,000. However, with connections with the margin, their lender may demand that he pay off the entire amount plus interest.
Protection of your investments
To minimize the risk while trading with cryptocurrency margins, consider the following strategies:
1.
- Diversify your portfolio : Spread your investments into many assets to reduce exposure to one specific coin or market.
- STOP-LOSS orders : Use Stop-Loss orders to automatically sell coins if they fall below a certain price, limiting potential losses.
- Monitor market conditions : Before making a place to market trends and liquidity.
Application
Trade with the margin of cryptocurrency is associated with considerable risk, especially for new investors. However, understanding the risk and taking steps to protect yourself, you can minimize the exhibition and potentially maximize your returns. Remember that the cryptocurrency market is inherently unstable, and even experienced traders can experience losses while trading with a margin. They always approach the trade margin with caution and remember about potential consequences.
references
- “Cryptocurrency margin trade” through Investopedia
- “Marginal trade risk” by balance
- “Variability of the cryptocurrency market” by Cindesk