Understanding of the risk of liquidation in the coverage trade: caution guide to cryptocurrency
The growth of cryptocurrencies caused a new era of commerce, with many investors who participated in platforms such as Coinbase, Binance and Kraken to buy, sell and exchange digital activities. Although the potential rewards of cryptocurrency investments are significant, there is a darker side of this world: margins trade.
Margini’s trade includes loan loans from the intermediation or bag to increase the size of the trading, allowing to take on more potentially higher risks and returns. At the same time, it is also provided with a steep price: if your position is against you, your account can be destroyed.
In this article we are immersed in the world of margins trade, exploring the risk of liquidation and alleviation in cryptocurrencies.
What is margin trade?
Covering trade allows you to exchange a greater amount of cryptocurrency than otherwise you can afford. This is achieved using money borrowed from brokers or bags, which are therefore used to finance trade. Behind the margin trade there is that if your position is against you, the lender will cover some of the losses.
For example, suppose to pay $ 10,000 to your covering account and to purchase $ 5,000 bitcoins at $ 1 = 3 exchange rate BTC. The balance of your account would be:
- Initial deposit: $ 10,000
- Funds borrowed (by creditors): $ 0 (since we did not borrow money)
- Balance available for trade: $ 10,000
Risks of liquidation
The liquidation occurs when the margin is considered too high for maintenance. For cryptocurrencies, this can occur when:
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- The size of the upper position exceeds the available funds : if you try to close a long or short position that is too big for the balance of your account, the bag will eliminate your position and take the funds from your account.
If your position is eliminated, the bases will be returned to Bitcoin, but with punishment and interest. For example:
- If you sell 1 btc at $ 10 = 3 btc, you will remain $ 2000.
- The bag provides for a 50% penalty for initial investments (for example from $ 10,000 to $ 5,000), more interest.
To mitigate the risks of cryptocurrency
Although the liquidation can be devastating, there are ways to reduce the effect:
- Diversify your portfolio
: distribute your investments between different cryptocurrencies and activities to minimize the exposure.
- Set the Stop-Loss orders: place automatic sales orders to limit losses by losing money in one position.
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- ** Monitor your account balance.
The best practices of the commercial cryptocurrency margin
Follow these proven exercises when it comes to the councils of the negotiation margin:
- Start with low lever : do not risk like 5-10 times the amount you can afford.
- Keep your small coverage account : aim of having a balance of $ 5,000-20,000 or less.
- Use reliable exchanges and brokers : Search and choose well -built platforms that offer safe and reliable commercial services.
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Conclusion
Although the coverage trade may be an exciting way to invest in cryptocurrencies, it is essential to understand the risks relating to liquidation.