How Does Using Stablecoins versus the Underlying Cryptocurrency (E.g. BTC) as Collateral Affect Leverage?
Using stablecoins as collateral simplifies leverage calculations and generally allows for higher leverage. Since stablecoins maintain a stable value, the collateral's fiat value is constant, meaning the margin requirement is fixed and predictable.
If the underlying asset (e.g. BTC) is used as collateral, its volatile price constantly changes the fiat value of the margin, which can lead to rapid "auto-deleverage" events or early margin calls even if the position's P&L is favorable.
Stablecoin collateral offers greater capital efficiency for leverage.
Glossar
Stablecoin Collateral
Foundation ⎊ Stablecoin collateral refers to the underlying assets held in reserve to back the value of a stablecoin, ensuring its peg to a fiat currency or another stable asset.
Stablecoins as Collateral
Stability ⎊ Stablecoins as collateral introduce a crucial element of stability to the highly volatile crypto derivatives market by providing a margin asset with a value pegged to a less volatile reference, typically a fiat currency like the US Dollar.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to capital at risk, a metric increasingly vital given regulatory constraints and market volatility.
Margin Calls
Trigger ⎊ Margin calls represent a demand from a brokerage or exchange for an investor to deposit additional funds or collateral to bring the account back to the required maintenance margin level, particularly relevant in leveraged cryptocurrency trading and derivatives markets.