What Is the Main Drawback of Using a Volatile Asset as Collateral for a USD-denominated Contract?

The main drawback is that the collateral's value fluctuates independently of the contract's P&L, introducing "collateral risk." For a USD-denominated contract, if the volatile collateral's price drops, the fiat value of the margin decreases, forcing the trader to post more collateral or face liquidation, even if the contract's P&L is neutral or slightly positive. This unpredictability increases the capital required and the frequency of margin calls.