Leverage In Cryptocurrency: It's Dis-advantages To Traders

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Hello family,

It is your favourite blogger @mato445 and I am here to discuss an interesting topic with you all.

In our last discussion, we learnt about what leverage in cryptocurrency means and we also discussed some of its unique advantages.

Today, we will be discussing on some of the dis-advantages of leverage in cryptocurrency, as we know, whatever have an advantage will also have some dis-advantages.

As we learnt previously, leverage is understood t to be the act of borrowing money inorder to increase your position size while trading the market.

While leverage has the potential to amplify profits, it is also accompanied with some dis-advantages and risk, which will be discussed today.

MARKET VOLATILITY

The cryptocurrency market are popularly known for their high volatility, that is, their ability to change rapidly and unpredictably.

Just as leverage amplifies profit, it also amplifies losses in a like manner, making traders much more vulnerable to the rapid price flunctuation in the cryptomarket.

In a market with high volatility, a small price movement can result in substantial losses, which can lead to a liquidation call for a position.

LIQUIDATION RISK:

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While making use of leverage in trading, a liquidation price is being set by exchanges.

One's position will be automatically closed when the market price reaches that liquidation level, and this is so as to prevent the occurrence of further losses.

The cryptocurrency market is susceptible to unpredictable and sudden changes, which can lead to frequent liquidation, especially when a trader makes use of a higher leverage.

MARGIN CALLS

A margin call can be explained to be a phenomenon that is said to have occurred when the market price drops below a certain threshold and for the position to be maintained, traders are required to make a deposit of additional funds.

The inability to fulfill margin calls can lead to a a forced liquidation call, compounding losses and also result to a trader's financial ruin.

INTEREST COST:

The use of leverage in cryptocurrency often involves paying an interest on the borrowed funds.

These cost can build up overtime, especially for long term traders

Failure of the market to move in the trader's direction can lead to potential losses, as the interest to be paid can erode the little profit made, which still result in potential losses for the trader.

PSYCHOLOGICAL IMPACT:

The psychological aspect of trading can be significantly intensified by leverage, thus leading traders to an emotional based decision making.

Impulsive actions may be promoted by the fear of loosing a leverage positions, actions such as the chase of losses by the increment of leverage Position, or a panic sell during market downturns.

Emotional trading is not fit for traders as it can result in bad trading decisions and amplification of losses.

LACK OF RISK MANAGEMENT:

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Another dis-advantage of leverage in cryptocurrency trading is that it undermines the Importance of risk management.

Traders tend to forfeit risk management when making use of a leverage position.

Due to leverage potential for quick and huge profit, traders often forget to add stop-loss to their position or they may neglect the execution of clear exit strategy.

The potential of significant losses is being increased by the lack of risk management in trading

Although leverage has the potential to amplify gains in the cryptomarket, it also comes with some potential dis-advantages.

Leverage should be approached with caution by traders who tend to make use of it.

And traders should endeavor to make use of a robust and effective risk management strategy.