What Is the Primary Risk Associated with Using Margin in Cryptocurrency Trading?
The primary risk is the amplified potential for losses due to leverage. Margin trading involves borrowing funds to increase a position size, meaning both profits and losses are magnified.
If the market moves against the position, the trader can face a margin call, and if the collateral falls below the maintenance margin, the position will be forcibly liquidated. This forced liquidation can result in losing the entire collateral (initial margin).
High volatility in crypto exacerbates this risk.
Glossar
Forced Liquidation
Trigger ⎊ Forced liquidation occurs when a trader's margin account falls below a predetermined maintenance margin level, compelling the broker or protocol to automatically close positions.
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.
Margin Trading
Leverage ⎊ Margin trading within cryptocurrency, options, and derivatives markets represents the utilization of borrowed capital to amplify potential investment returns, though simultaneously increasing exposure to risk.
Leverage Ratio
Amplification ⎊ ⎊ Leverage ratio, within cryptocurrency and derivatives markets, represents the use of borrowed capital to increase potential exposure to an underlying asset, magnifying both prospective gains and potential losses.