Understand the trade risks of isolated margins in cryptocurrency
Cryptocurrencies have gained significant popularity over the years, many investors who have tried to use their potential growth. However, an aspect of the transaction of cryptocurrencies that can be particularly dangerous is isolated margin trade. In this article, we will deepen the risks associated with the isolated margin trade and explain why it is essential that investors understand these risks before participating in cryptocurrency trade.
What is isolated margin trade?
The isolated margin trade refers to a type of margin of trade in which a merchant maintains its own separate funds from those used for trade. This means that any loss suffered during the negotiation session is backed only by the merchant, while their other assets are not affected. In an isolated margin account, the merchant has two separate accounts:
- Main margin account : This is the account used for trade and generally contains a sufficient amount of funds to cover potential losses.
- Isolated margin account : This is the account that maintains its own funds, separated from those of the main margin account.
Risks associated with isolated margin trade
Isolated margin trade has significant risks that include:
- Liquidity risk : If the merchant’s main margin account is exhausted, it may not have enough funds to cover potential losses, which makes it difficult to maintain a position or even close the existing positions.
- Collateral risk : If the merchant closes a loss position in its isolated margin account and uses guarantees to do so, run the risk of liquidating other assets that are not intended for this purpose.
- The margin call risk : When an isolated margin account is used, the merchant can receive a margin call if his main margin account falls below a certain threshold. This can lead to additional losses for the merchant and probably force them to close the positions that cannot afford to lose.
- ** Risk of counterpart
Consequences of the risk of ignoring
Ignoring the risks associated with isolated margin trade can have serious consequences for investors, which include:
- Financial losses : merchants who do not manage their risk may suffer significant losses, which could lead to a financial ruin.
- Regulatory action : Regulatory bodies, such as the Future Communication Commission (CFTC) or the Commission for Exchanges of Securities and Values (SEC) can take measures against merchants who participate in margin trade without adequate supervision.
Risk attenuation
To relieve these risks, it is essential that investors understand their own risk tolerance and effectively manage their transactions. Here are some steps that can help you:
- Diversification : Disseminates investments in multiple classes and market to minimize exposure.
- Establish realistic objectives
: Understand possible investment yields and establish realistic objectives based on market conditions.
- Use risk management tools : Use risk management tools, such as positioning or liquidation dimensioning orders, to limit losses and manage risk.
Conclusion
Isolated margin trade can be a high -risk activity for investors who do not understand their own risk tolerance and do not have effective risk management strategies. Recognizing the risks associated with isolated margin trade and take measures to mitigate them, operators can minimize potential losses and guarantee long -term financial success in cryptocurrency markets.
