How Do Different Exchange Collateral Types Affect Margin Call Risk?
Exchanges may accept various cryptocurrencies as collateral. Using volatile collateral (e.g. altcoins) increases margin call risk because a drop in the collateral's value itself can trigger a margin call, even if the position is stable.
Using a stable collateral (e.g. stablecoins) reduces this risk, as the collateral value is less volatile.
Glossar
Volatile Collateral
Exposure ⎊ Volatile collateral, within cryptocurrency derivatives, represents assets pledged to secure positions where underlying value is subject to rapid price fluctuations.
Margin Call
Trigger ⎊ A margin call in cryptocurrency, options, and derivatives markets represents a broker’s demand for additional funds to bring an account back to the minimum required margin.
Exchange Collateral Types
Guarantee ⎊ Exchange collateral types represent pre-funded resources utilized to mitigate counterparty credit risk within derivative transactions, notably in cryptocurrency markets where centralized exchange oversight is paramount.
Margin Call Risk
Exposure ⎊ Margin call risk within cryptocurrency derivatives arises from leveraged positions, where potential losses exceed initial collateral, triggering a demand for additional funds.
Stable Collateral
Definition ⎊ Stable collateral refers to assets used to secure loans or derivatives positions that exhibit minimal price volatility, thereby maintaining a stable value relative to a fiat currency or other benchmark.