Unseen Risk: Understanding the risks of liquidation in margin trade
Cryptocurrency trade has become increasingly popular in recent years, and many investors speculate on the possibility of significant benefits. However, one aspect of trade in the boundary, often ignored, is the risk of liquidation. In this article, we will go into the cryptocurrency differences in the trade world and explore the risks related to liquidation.
What is edge trade?
Margin’s trading means borrowing money from a broker to buy more coins than you can afford to buy directly. This allows investors to potentially make significant profits when the active price increases. However, it also has a high risk that the market may decrease, leading to the elimination of your position.
What is liquidation?
The liquidation occurs when the investor’s position in the cryptocurrency falls below a certain threshold, forcing the broker to sell the coins and transform them into cash. This can happen for a number of reasons:
- Market Visibility : If the asset price drops significantly, the value of your condition may decrease, causing its elimination.
- Price fluctuations : The cryptocurrency market is known for its high volatility, which means that prices can fluctuate rapidly. If you do not have enough spare, a sudden drop in prices can cause elimination.
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Liquidity risk : If the liquidity of a certain cryptocurrency decreases, then when needed, it may become harder to sell your coins.
Risks associated with liquidation
While liquidation is an essential mechanism for preventing potential losses, it also poses significant risks:
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Loss of Mark
: Removing position can cause significant losses if the market price drops.
- Broker Fee
: Depending on the broker fee, you may be charged with additional fees to cover the cost of liquidation of your coins.
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Tax impact : In some jurisdictions, liquidation may lead to tax liabilities due to capital gains.
Examples of liquidated positions
To illustrate the risks associated with liquidation, let’s consider an example:
Suppose you invest $ 100 Bitcoin (BTC) at a price of $ 10,000 per coin. If the price drops to $ 5,000, your position would be sold for $ 50,000 and converted in cash.
* Losses of Mark : If you were unable to sell your coin reserves at the time of the call, you would cause significant losses for $ 4,500 ($ 100 – $ 50,000 = – $ 40,000).
Broker Fee : The broker can charge additional fees, such as 2-3% of your liquidation price, resulting in an additional $ 1000-1800 ($ 0.02-0.03$ 50,000).
* Tax Effect : Depending on your jurisdiction, you may be exposed to capital gains taxes on the sales of coins at a lower price.
Risk softening
While liquidation is an inevitable risk for trade to be done, there are steps you can take to reduce its impact:
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Diversification : Spread investment in different cryptocurrencies and asset classes.
- Position size : Limit the size of the position to avoid significant losses if the market is falling.
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Review Orders : Use stop loss orders to automatically sell coins when they fall below a certain threshold.
- Balancing the usual portfolio : Periodically review and customize your portfolio to make sure it is still in line with your investment goals.
Conclusion
While liquidation is a characteristic risk of cross -employment trade, it is important to understand the risks related and to take measures to reduce them. By diversifying your investments, limiting the size of the position and using suspension orders, you can reduce market volatility and reduce potential losses. Remember that cryptocurrency markets are essentially volatile, and despite these precautions, liquidation can still occur.