A Crypto Marketer is an experienced professional in the crypto market, and he knows a thing or two about margin calls. Margin calls are one of the most important concepts to understand when trading cryptocurrencies, and they can lead to costly mistakes if you don’t know what you’re doing. In this post, we’ll explore margin calls in crypto with Dennis Loos Crypto Marketer and learn how to avoid them.
What is a Margin Call?
A margin call is a demand from a broker or lender to a trader or borrower to deposit additional money or securities so that the margin account is brought up to the required minimum level. This is because the value of the securities in the account has dropped below the set margin requirements. The call may come as a warning before the total margin call and is often seen as a way for the broker to protect itself from further losses due to the trader’s position. It is also a way to protect investors from taking on too much risk with their trading accounts.
Crypto Space
In the crypto space, margin calls are becoming increasingly common due to the increased volatility of cryptocurrencies. When traders open positions using borrowed funds (known as “leverage”), they take on a higher degree of risk than traders who are only investing with their capital. Leveraged traders must keep an eye on the performance of their positions and adjust them accordingly to prevent incurring significant losses. If the price of an asset falls beyond a certain point, the trader will be subject to a margin call where they must either pay off their debt or deposit more funds into their account to cover any potential losses.
Why Does it Happen?
A margin call is a situation in which a trader’s account balance falls below a certain level, usually due to the price of an asset falling. When this happens, the broker or exchange will require the trader to add more funds or close out their existing positions to meet their margin requirement.
Margin calls are most common when trading on margin (or using borrowed money) to purchase assets. In this case, the trader has taken on more risk than they can handle with the funds in their account. If the asset’s price drops too much, its leverage increases, and its account balance may no longer meet the required margin.
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When this happens, the broker or exchange must act quickly to protect their interests. They will issue a margin call and either force the trader to add more funds to their account or close out their positions to reduce their risk exposure.
In the crypto market, margin calls can happen more frequently due to the volatile nature of digital currencies and the ability to trade on margin. Crypto traders must know their risks and understand that a margin call is always possible. By monitoring their positions closely, traders can ensure they can stay above their required margin level and prevent unnecessary losses.
How to Avoid It?
Margin calls can be avoided by understanding the risks associated with trading and taking a conservative approach to your investments. Before engaging in margin trading, it is essential to assess your risk tolerance and the potential for loss that comes along with margin trading.
It is also essential to closely monitor your positions and know the current market conditions. When markets become more volatile, your positions may become vulnerable to a margin call if you have not taken appropriate steps to protect them. You can minimize the risk of a margin call by only investing an amount you can afford to lose and constantly monitoring your positions.
Another way to avoid a margin call is to set stop-loss orders. Stop-loss orders are designed to automatically close out a position at a predetermined price to protect against further losses. For example, if you bought a particular cryptocurrency at $10 and set a stop-loss order at $9, the position would automatically close out at $9 and protect you from additional losses.
Finally, diversifying your portfolio can help reduce the risk of a margin call. Investing in different types of assets can better spread out the risk of one particular asset tanking and creating a margin call situation. Investing across different asset classes can also provide stability in extreme volatility.
What to do if you Get One?
If you get a margin call in crypto trading, it can be a very stressful and intimidating experience. But if you are ready, it doesn’t have to be. When you get a margin call, the first thing to do is to assess the situation and determine what caused it. If the reason was excessive leverage, then you need to reduce your exposure and adjust your strategy.
The second step is to act quickly and manage the margin call before it becomes a bigger problem. Depending on the platform, different options can help you mitigate the situation. You may be able to close out some positions or add additional margins to satisfy the call. If the margin call comes from a broker, you may need to deposit additional funds to satisfy the demand.
It’s essential to keep in mind that you should never attempt to take on more risk to meet a margin call. Doing so could put you at further risk of losses and even more financial trouble.
Finally, it’s important to remember that margin calls can happen and are part of trading. If you manage your risk correctly, they should be seen as an opportunity to review and adjust your strategy rather than an emergency.
