The Impact of Margin Calls and Liquidation in Trading Crypto Futures

Futures are a valuable tool for businesses and investors looking to secure predictable cash flows and protect against price volatility. By entering into futures contracts, traders can purchase or sell an underlying asset, such as commodities, stocks, or cryptocurrencies, at a predetermined cost in the future. This form of financial agreement offers a smart risk management strategy that all savvy business owners should consider.

What are Futures in Crypto?

Crypto futures trading provides the ability to purchase or sell particular cryptocurrencies at an agreed-upon cost and time in the long run. Just like a regular stock, commodities, and other future markets, crypto futures can be used as a risk management tool by businesses and investors alike to protect against dramatic price fluctuations.

When navigating the crypto futures market, traders must choose a particular agreement with an expiration date and rate already predetermined. Depending on their forecast for the cryptocurrency in question, they may decide to purchase or sell the contract:

  • if traders are optimistic about the asset’s value rising, then buying;
  • when they are predicting it will drop in price, then selling is more appropriate.

What are Margin Calls and Liquidation?

Crypto futures traders must always be mindful of margin calls and liquidation, as these can dramatically alter a trader’s position and overall success.

When trading futures, a trader must provide the exchange with an allocated sum as collateral for their position; that amount is known as a margin. The size of this requirement varies depending on which contract one chooses to trade and where they are trading it from.

If the market’s performance deviates from a trader’s expectation, and their margin dips below the mandated minimum requirement, an exchange may claim a margin call to force them to contribute supplemental resources. This ensures that they maintain adequate capital in their account for trading activities.

If a trader neglects to answer the margin call, the exchange may take it upon itself to close a trader’s position and liquidate any underlying cryptocurrency assets to mitigate losses. Liquidation can be detrimental for the trader, as cryptocurrencies are likely to be sold at a price lower than what was initially agreed upon. Furthermore, fees and fines associated with liquidations could further damage their pockets.

It is essential to strictly monitor your margin levels as well as use risk management tools such as stop-loss orders. Additionally, you must be knowledgeable of the rules and regulations governing the exchange you are trading in along with any futures contract being traded. Ultimately, margin calls and liquidation can dramatically alter your position, thus influencing your overall profit when trading crypto futures.

Check out the WhiteBIT crypto futures platform – it offers perpetual futures, which have no expiration dates.

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