Investments in traditional markets are very close to cryptocurrency markets in the sense that you can have losses if the market price goes against the direction that you intend it to.
Futures contracts are rifer with losses as there is leverage involved.
Even though this can help you multiply your profits manifold, you can also run into a large number of losses.
The cryptocurrency space is notorious for large amounts of volatility which has traders using high amounts of leverage in a bid to make quick profits.
The use of high leverage can also lead to liquidations that will lead to the total loss of the invested margin.
This article takes you through the ways in which you can lose more than your invested money and how to prevent this from happening.
When you buy a crypto Futures contract, you will hopefully use a safe amount of leverage to help multiply any profits that you might make.
In case the price of the asset goes against the direction of your bet, your position will receive what is referred to as a ‘margin call’ wherein you must close your position or invest more capital to prevent the liquidation of your position.
The other is called Cross-Margin trading, which can use the money in your Futures wallet to fund the position in case of a margin call.
Cross Margin Trading
When you take a Cross-Margin trade, your initial investment is used to fund your position at the beginning.
In case your position is nearing liquidation, the assets in your trading wallet will be used to further fund the position and keep it open.
- Assets in a cross-margin position are shared between all open positions on the account
- Every user is only allowed to open one cross-margin account, and all your assets are available in this account
- Your margin level and hence liquidation price is calculated by taking into consideration all the assets in the account
If your position does get liquidated, you will lose all the balance in your cross-margin trading account.
Take, for example, that you enter a long Cross-margin Futures trade for 1 Bitcoin when the market price is $16,600.
Your leverage in this position is 125x as you are very confident in your trading thesis and expect the price of Bitcoin to rise and reach your price target.
In this case, the initial margin that you will need to put up is $16,600/125 = $132.8. If the balance of your Cross-Margin account is $200, your liquidation will happen when the market price drops to $16.468.94.
When this happens, you will not only lose the initial margin of $132.8 but also the rest of the wallet balance of $67.2.
So you will end up losing more than the money you have invested into this trade.
New to crypto futures trading? Learn How much money you need to trade Futures contracts?
How To Avoid Complete Wallet Balance Losses?
Good traders use some methods to make sure they don’t wipe out their trading balance in a few trades. Some of them are explained below:
- Using Stoploss orders – Traders will calculate their risk: reward ratio before entering a trade, or in other words, how much money they are willing to lose on this trade. This well-known trading strategy will prevent the trading position from reaching the liquidation price and hence causing a complete loss of the invested money and potentially more.
A liquidation calculator and diligent technical analysis can help you set a stop-loss order so that it does not close your position if a stop-loss hunt happens in the market, hence preventing you from reaching your price target.
- Reducing the amount of leverage – Using a lower amount of leverage will help in preventing your stop loss from getting triggered by small fluctuations in market price and also increase the leeway you have before getting liquidated.
In the above example, if the leverage is reduced to 50x, you will have to put up a larger amount of initial margin, but your liquidation price will also drop by quite a bit.
- Keep an eye on the Margin Ratio – Your position is only liquidated when the Margin Ratio hits 100%. You can prevent this from happening and save your position from liquidation by adding more money to the position or your wallet.
This solution requires you to be available near a device when the market price decides to go against you.
This is difficult to maintain as the crypto market is 24/7, and we humans need to sleep and carry out other functions besides staring at the Margin Ratio of our trading position.
So this solution is not very feasible but is useful to have in your repertoire if you need to prolong your losing trade from being liquidated in front of you.
Futures trading is risky, and when you add crypto into the mix, you need to pay a lot of attention; otherwise, you can take a lot of losses very quickly.
This article should be taken as an understanding of what can go wrong and have you lose more than your originally invested money.
Of course, if you do it well, you can make large profits with Futures trading, but this will require diligent practice and learning from your losses. So make sure not to wipe out your trading balance in a few trades.
It is a good idea to start by investing a small amount of margin in each position you open and increasing position size as you gain confidence in your skills. Or you can first start with margin trading to gain experience and then switch to futures trading.
Remember to always practice good risk management.