Trading Bitcoin: Understanding Margin Calls
Bitcoin technology has grown and evolved tremendously since its inception in 2009. With this growth comes new, revolutionary ways to trade in Bitcoin. Since Bitcoin is becoming much more common as a currency, the methods for trading Bitcoin are starting to parallel existing methods for trading investments in traditional currencies.
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There are several online markets that allow you to trade Bitcoin. They work similarly to a stock market in many ways. .One of these similarities is the presence of a margin call. Put simply, a margin call is a demand that investors, or in this case, Bitcoin traders, deposit money to cover any potential losses.
However, each exchange has different rules and regulations for Bitcoin margin trading. With Bitcoin margin trading, each investor works with a broker to bet on the value of Bitcoin. The value of a Bitcoin is very volatile and can change daily, making this process somewhat risky.
Understanding Margin Calls
Margin calls are dependent on a user’s equity within a Bitcoin marketplace. Equity is defined as the amount of money you would be able to withdraw if all your transactions closed out as is at the current moment. When your equity falls below a certain level, this is when the marketplace will initiate a margin call.
Each marketplace has their own standard for margin call thresholds. Here is a detailed look at some of the most popular exchanges and their respective market calls.
OKCoin is a Bitcoin exchange that is based out of China and is popular around the world. They also offer many other Bitcoin-related services. Their initial margin requirement is five percent. This means that, if you want to open transactions totaling 100 Bitcoins, you must deposit an additional five Bitcoins. Throughout your trading, you must maintain an equity threshold of one percent. This means that if you have 100 Bitcoins in open transactions, you must have 101 Bitcoins in your account.
If your account falls below this threshold, the exchange will be forced to liquidate your account. OKCoin will confiscate your remaining equity and close out your positions. If you have any remaining equity, it will be used to cover losses of other users, and you will not be able to get it back. OKCoin is generally considered to have the harshest liquidation process out of all the major Bitcoin exchanges.
BitMEX is a highly advanced Bitcoin exchange platform that is geared towards serious traders. Their target member needs a system that is very complex and, in this regard, it offers many trading options.
The initial margin for this marketplace is 30 percent, and their margin call threshold is 20 percent. However, unlike OKCoin, they will notify you via email when you are approaching the margin call threshold. If your account falls below the threshold, they will liquidate the lowest amount of your positions to raise your account to the threshold level. If your account continues to reach the margin call threshold, they will liquidate all of your positions until you deposit more bitcoins.
Bitfinex is another marketplace for digital currencies. Their thresholds are somewhat similar to BitMEX. Their initial threshold is also 30 percent, but the margin call threshold itself is only 15 percent.
The liquidation process used by this exchange, however, is a bit different. They will place a market order to cover your open positions when you fall below the margin call threshold. This can have a huge effect on the market overall.
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