High -risk world of cryptocurrency trade: understanding the risk of leverage
The cryptocurrency trade has become increasingly popular in recent years, with many investors sought to take advantage of the potential of fast exchange rates. However, this popularity also entails a significant risk factor: leverage. While leverage can give you the opportunity to trade higher positions at lower costs, this will increase the risk of significant losses if it is not properly treated.
What is the leverage?
The leverage in the cryptocurrency trade applies to the use of borrowed funds or to the margin account to increase the potential profit or loss of trade. This allows merchants to take more risk than cash trade, but discipline and caution are also needed to avoid significant losses.
To understand leverage, consider an example:
Suppose the trader buys 10 bitcoin (BTC) every $ 9,000 with a $ 100: 1 leverage factor. If the price falls to $ 6,000 due to market fluctuations, the trader can lose $ 700 per coin (difference between the original purchase and selling prices). This is a significant risk as it represents 7.5% of the initial investment.
Risks related to leverage
While leverage can provide an opportunity for rapid profits, it has many risks with its use:
- Liquidity Risk : If trade with margin, creditors (or brokers) do not have enough funds to cover the merchant’s position when they are against them.
- Rargin Call : If the market goes in a direction that is contrary to the trader’s expectations, it can get a margin call, forcing them to sell their wealth or pay a higher interest rate on their loan.
- Voat Risk : The leverage reinforcement is the margins, thus a greater challenge for merchants to manage the risk. During the high volatility, small changes in market conditions can also cause significant losses.
- Margin Requirements : In order to maintain the leverage, merchants must deposit a greater amount of capital than if they were to be traded without a leverage. This increases the overall costs of commerce and puts a greater risk.
- Default risk : If the lender or broker fails to fulfill their obligations, the trader may leave significant losses.
Risks mitigate
While understanding the risks associated with leverage is essential for trade in cryptocurrencies, many strategies can help alleviate these risk:
- Diversify your portfolio : Distribute your investments in various asset classes and markets to reduce the exposure of a given market or asset.
- Use margin responsibly : Use Margo only if you have enough funds to cover potential losses and are ready to absorb the effect of margin call.
- Monitor market conditions : Keep an eye on market conditions and modify the trading strategy accordingly to minimize risk.
- Set Stop-Loss Orders : Set Stop-Loss Orders to Limit Possible Losses if Trade is not for your benefit.
- Consider the various leverage ratios : Experiment with different leverage rates (such as 1: 100, 2:50) to find the optimum balance between risk and commercial strategy reward.
Conclusion
Cryptocurrencies on the leverage trading have significant risks that must be carefully examined before entering the market. While leverage offers the opportunity to gain rapid profits, discipline and caution is needed to avoid significant losses. By understanding the risks of leverage and implementing strategies to alleviate them, merchants can make well -founded decisions and minimize their exposure to market volatility.
Recommendations
- Begin by getting to know the basics of cryptocurrency trade and understanding the concept of leverage.