Volatility is one of the most common features of the crypto market. Bitcoin and other cryptocurrencies tend to change in value from time to time and are thus high-risk investments. However, it is from these price changes that traders can make money when investing in Bitcoin or any other crypto.
For example, Bitcoin hit the highs of $65,000 by mid-2021 from the lows of around $4,000 in April 2020. These are some high increases rarely experienced in traditional assets classes.
To increase the chances of gaining, even more, the crypto world has embraced derivative products like crypto futures, margin trading and perpetual swaps. However, gains are never assured in the crypto trades. Therefore, increasing the chances of gaining also come with similar risks of losses.
Margin trading, for example, allows you to borrow more funds when staking. Leading cryptocurrencies like Coinbase and BTC markets have the feature. You get to borrow from the exchange platform for more gains. For example, instead of staking $50, you can opt to borrow a 4x margin such that you stake $200. However, in case of value decrease, you risk high margin losses as well. In some cases, your account might end up being liquidated.
What is liquidation?
In the crypto markets, liquidations refer to when you are forced to exit a position to avoid negative equity due to partial or total loss. It occurs when the trader cannot fund their position any longer. In leveraged positions, the losses can run the account into negative balances which makes it unsustainable to maintain, leading to liquidation.
The possibility of liquidation depends on the leverage the trader holds. For example, lower might not affect the balances so much, hence lesser risks of liquidation. However, in higher leverage, any decline in crypto market value can mean massive losses.
The leverage is considered risky such that they are banned in countries like the US, Australia and UK.
Tips to avoid liquidation
Even though losing positions is part of crypto trading, liquidation does not always have to occur. Here are some of the ways to avoid liquidation when trading crypto;
Use a stop loss
The first step towards crypto trading is to understand the amount you are willing to lose. Once you understand the value, you can always enact it when trading. Most crypto trading platforms provide the stop loss such that the position stops automatically until it reaches a certain amount. Even though you will still lose, you won’t go past a certain point hence you don’t risk liquidation.
Monitor the margin ratio
The other way to avoid liquidation is by monitoring the margin ratio. It involves ensuring the margin does not hit 100%. Any time the margin is near 100% you keep the position alive by adding more of it. This allows you to keep trading for long without risking liquidation.
Use lower leverage
By using higher leverage, you are looking for the possibility of higher gains. However, it is detrimental in case of losses. Therefore, keep safe by using lower leverage.