Subsidiaries trades offer up to 100x leverage, however, traders should consider how Bitcoin‘s intraday instability builds their liquidation risk.
the crypto area is in a positively trending market, and successive proof comes from unknown traders who post their five-, six-and seven-figure speculation returns as screen captures on Crypto Twitter.
This condition makes a FOMO-like circumstance where everybody gets eager. The compulsion to help expected income by multiple times or more is regularly overwhelming for most amateur brokers.
Today, almost every cryptocurrency exchange offers leveraged trading using derivatives. To enter these markets, a trader has to first deposit collateral (margin), which is usually a stablecoin or Bitcoin (BTC). However, unlike spot (regular) trading, the trader cannot withdraw from a futures market position until it has been closed.
These instruments have benefits and can improve a trader’s outcomes. However, those who often rely on incorrect information when trading futures contracts end up with heavy losses rather than profits.
The basics of derivatives
These leveraged futures contracts are synthetic, and it is even possible to short or place a bet on the downside. Leverage is the most appealing aspect of futures contracts, but it is worth noting that these instruments have long been used in stock markets, commodities, indexes, and foreign exchange (FX).
In traditional finance, traders measure daily price change by calculating the average closing price changes. This measure is widely used in every asset class, and it’s called volatility. However, for various reasons, this metric isn’t helpful for cryptocurrencies and can harm leverage traders.
To be brief, the higher the volatility, the more often an asset price presents wild oscillations. Contrary to the expectation, moving up by 7% to 10% every day represents a low volatility indicator. This happens because the deviation from the mean is small, while random fluctuations between a negative 3% to a positive 3% present a much wider range.
Markets with very low volatility are perfect for leverage
Knowing the general range of how an asset oscillates is extremely important when opening leverage positions. Take the British Pound Sterling (GBP), for example, and one will notice that its volatility is usually below 1% as surprise aggressive daily price changes are unusual.
FX markets are relatively stable markets when compared with stocks and commodities. Therefore, some regulated brokers offer even 200x leverage, meaning a 0.5% move against the position would cause a forced liquidation.
For a cryptocurrency trader, the Swiss Franc’s (CHF) daily change versus the U.S. dollar would likely be seen as a stablecoin.
However, the 3.4% daily Bitcoin volatility hides a more dangerous price fluctuation. While measuring daily closing prices for traditional markets makes sense, cryptocurrencies trade non-stop. This difference potentially creates much wider movements within the same day, although the daily closing often masquerades it.
20x leverage seems crazy considering Bitcoin’s daily moves
To place things into viewpoint, a 5% move off course is sufficient to sell any 20x utilized Bitcoin position. This information is obvious proof that merchants should consider hazard and instability when influence exchanging digital forms of money.
Quick benefits are decent, however what is more significant is having the option to endure the typical every day value swings to clutch those hidden increases.