Cryptocurrency market manipulation. Part 6 — Margin trading.
Margin trading is not so widespread in the markets of cryptocurrency, but most likely in the near future will become the same integral part of the virtual market as it became in the stock and bond markets.
Margin trading is the trade in loans secured by the funds or assets on the account. Let’s say a happy new trader speculator has $100 on the account. Under this asset, the stock exchange or broker can give him a loan, for example, in the amount of $1000, to buy coins or to give the loans in coins for the amount of $1000, so that the trader could open a short position (sell the borrowed securities now to buy them cheaper later). The size of the loan provided depends on the conditions of the particular exchange and the liquidity of the particular asset.
This is where the banal human greed comes into play! Having only $100 on the account, knowing about such generous offers of the exchange, the trader begins to dream about how much he could earn using this “leverage”, as he already buys a new apartment, car, yacht or plane :). Of course, he is in a hurry to take advantage of the offer.
What is the point of the exchange being so generous? The meaning for the exchange in these operations is earnings. After all, a newcomer pays them interest for a loan, pays them a commission when buying and selling assets, but the exchange does not bear any risks at all. After all, all the operations of the trader and his balance are under strict control and as soon as the size of own funds from the incorrectly chosen position of the beginner approaches 0, the exchange closes the limit for him, there is a “margin call” and everything that he has will be sold.
For example, with a $100 equity, the exchange gave another $ 1000 in loans, and the trader bought Ethereum at $300 (about 3.66 coins). As soon as the price of Ethereum drops to $275, the loss of the trader will be $91.5, i.e. it’s almost all of his own funds and the exchange will automatically sell the available assets in order to return his loan. This was a theoretical situation, when the exchange is waiting for a virtually complete zeroing of the customer’s account, in practice, it will begin closing his positions a little earlier, in time to sell everything at the satisfactory prices.
The reverse situation, when a newcomer takes coins in a loan from the exchange. So, if you roll over the example mentioned above, under the available $100, the exchange will give a loan of 3.33 Ethereum coins, which the trader will sell in the hope of buying them back at $275. But the dastardly market will go the wrong way again (well, we have already known why … ..) and at a price of $325 the trader’s position will automatically close again, buy coins and return it to the stock exchange.
As we said earlier, the exchange, in this case, is a manipulator, it knows the positions of all its customers, including levels where they are triggered by margin calls and necessarily moves the price there, even once, for a second. After all, that is enough to robot start closing positions.
Say thank to margin trading that manipulators organize the most grandiose market falls and ups. After all, when the position of a trader without a loan, he will think a hundred times whether to close the deal or to suffer a temporary loss. But when he is in margin position, the decision is out of his control, the robots will perform everything automatically.
Execution of margin transactions by broker or exchange is like an avalanche. For example, assume that there are 3 participants in the market (John, Dick and Mike) and each own $100. Each of them borrowed money from the exchange and bought Ethereum, but John took $1000, Dick took $800, and Mike took $600. Consequently, the margin calls will occur at different levels. So, at a price $275, the margin-call will come to the risky guy John, who took the maximum possible loan and, therefore, he is the first to lose his deposit. The closing of John’s positions (sale) will lead to a further drop in the price to $265–270, thus the margin call will come to the more cautious Dick. Closing Dick’s positions will also lower the price and lead to the closure of Mike’s position, and so on. Moreover, the lower the price, the more and more margin calls will be triggered. And at the very bottom or peak, the evil monster will buy everything cheaply or sell everything at inflated prices. Have you ever seen the unexplained avalanche-like ups and downs of prices for the most liquid assets, to levels that are even hard to imagine? Most likely these were margin calls.
That’s all, only by pushing in the right direction the price of the asset, the monster again robbed everybody.
There is only one conclusion. Do not work with margin trading on cryptocurrency market! Buy and sell only on your own. Otherwise, you risk losing everything easily.