Understanding The Risks Of Liquidation In Margin Trading
The invisible risk: understanding of the risks of liquidation in margin trading
The cryptocurrency trade has become increasingly popular in recent years, with many investors who hypothesize the potential for significant earnings. However, an aspect of margins trading that is often overlooked is the risk of liquidation. In this article, we will deepen the world of commercial cryptocurrency margin and explore the risks associated with liquidation.
What is the trading margin?
Margini’s trading includes the loan of money from a broker to buy multiple coins than you can allow you to buy openly. This allows investors to potentially obtain significant profits if the price of the activity increases. However, it also has a high risk that the market may decrease, causing liquidation of the value of your position.
What is liquidation?
The liquidation occurs when the value of the position of an investor in a cryptocurrency falls below a certain threshold, triggering the broker to sell the coins and convert them into cash. This can happen for several reasons:
- Mercato volatility
: If the price of the activity decreases significantly, the value of your position can decrease, causing liquidation.
- Price fluctuations : the cryptocurrency market is known for its high volatility, which means that prices can flow quickly. If you don’t have enough margin, a sudden drop in the price can lead to liquidation.
- Risk of liquidity : If the liquidity of a particular cryptocurrency decreases, it could become more difficult to sell your coins when necessary.
Risks associated with liquidation
While liquidation is an essential mechanism to prevent potential losses, it also involves significant risks:
- The loss of the margin
: the liquidation of a position can involve significant losses if the market price decreases.
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Examples of liquidated positions
To illustrate the risks associated with liquidation, we consider an example:
Suppose to invest $ 100 in Bitcoin (BTC) on the sidelines at the price of $ 10,000 per coin. If the price drops to $ 5,000, your position would be sold for $ 50,000 and converted into cash.
* Loss of margin : you would incur a significant loss of $ 4,500 ($ 100 – $ 50,000 = – $ 40,000) if you are unable to sell your coins within margin call.
Intermediation commissions : the broker could charge additional commissions, for example 2-3% of the liquidation price, resulting in $ 1,000- $ 1,800 (0.02-0.03$ 50,000).
* Tax implications : depending on the jurisdiction, you could be subject to taxes on the capital gains on the profit made by the sale of coins at a lower price.
Mitigated risks
While liquidation is an inevitable risk in margin trading, there are steps that you can take to mitigate its impact:
- diversification : spread your investments in different cryptocurrencies and activities of activity.
- Dimensisation of the position : limit the size of the position to avoid significant losses if the market decreases.
- Stop-Loss orders : Use Stop-Loss orders to automatically sell your coins when they go below a certain threshold.
- Ribilantion of the regular portfolio : review and periodically adjust your wallet to make sure that it remains aligned with your investment objectives.
Conclusion
While liquidation is an intrinsic risk in margin trading, it is essential to understand the risks involved and take measures to mitigate them. By diversifying your investments, limiting the size of the position and using arrest orders, it is possible to reduce exposure to market volatility and minimize potential losses. Remember that cryptocurrency markets are intrinsically volatile and liquidation can still occur despite these precautions.
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