The cryptocurrency sector is in a bull marketand the frequent evidence comes from Anonymous traders publish their five-, six- and seven-digit investment returns as screenshots on Crypto Twitter.
This state creates a FOMO-like situation where everyone becomes greedy. The temptation to multiply potential wins by twenty times or more is often irresistible to most beginners..
Today, Almost all cryptocurrency exchanges offer trading in leveraged derivatives. To enter these markets, a trader must first provide a guarantee (Margin), which is usually a stablecoin or bitcoin (BTC). In contrast to (regular) spot trading The trader can only withdraw from a position on the futures market once it has been closed.
These tools have advantages and can improve a trader’s results. However, Those who frequently rely on incorrect information when trading futures contracts have big losses instead of profits..
The basics of derivatives
These leveraged futures contracts are synthetic and it is even possible to take short positions or place a bear bet. Leverage is the most attractive aspect of futures contracts. It should be noted, however, that these instruments have long been used in the stock, commodity, index and currency markets..
In traditional finance, traders measure the daily price change by calculating the average of the closing price changes.. This metric is widely used in all asset classes and is known as the “metric” volatility. However, this metric is for various reasons Not useful for cryptocurrencies and can hurt traders through leverage.
In summary, The higher the volatility, the more often the price of an asset fluctuates sharply. Contrary to expectations, an increase of between 7% and 10% per day is an indicator of low volatility. This happens because the deviation from the mean is small, while random fluctuations between negative 3% and positive 3% have a much larger range.
Very low volatility markets are perfect for leverage
When opening leverage positions, it is extremely important to know the general range of oscillations of an asset.. If we take the British Pound (GBP) as an example, we will find that its volatility is typically below 1% as surprisingly aggressive daily price changes are rare.
The currency markets are relatively stable compared to stocks and commodities. As a result, some regulated brokers even offer 200x leverage, which means that a 0.5% movement on the position would cause a forced liquidation.
For a cryptocurrency trader, the daily change in the Swiss franc (CHF) against the US dollar would likely be a stable currency.
However, the 3.4% daily volatility in Bitcoin price hides a more dangerous price fluctuation. While measuring the daily closing prices of traditional markets makes sense, cryptocurrencies trade without interruption. This difference potentially results in much larger movements in the same day.although the daily closure often masks it.
The average change between the intraday high and the low for Bitcoin over the past 180 days is 6.5%. As shown above, these “intraday moves” exceeded 10% 25 times. This means that in reality Bitcoin price volatility is much higher than expected for an asset with 3.2% daily volatility.
The 20x leverage seems insane given Bitcoin’s daily movements
To put things in perspective, moving 5% in the wrong direction is enough to liquidate a 20-fold leveraged Bitcoin position. These data are clear evidence of that Traders should consider risk and volatility when using cryptocurrencies.
Quick wins are nice, however The most important thing is to be able to weather the usual daily price fluctuations in order to sustain those unrealized gains.
While there is no magic number to determine the best leverage for any trader, the effect of volatility needs to be taken into account when calculating settlement risks. Those who intend to hold positions open for more than a few days and seek leverage of 15x or less seem “reasonable”..
The points of view and opinions expressed here are exclusively those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You need to do your own research when making a decision.
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