Are margin and futures trading risky tools?
While investors find margin trading and futures very attractive because of their potential returns, they should be cautious and consider all the risks before adopting them.
Risks associated with margin trading
Crypto margin trading is riskier than standard trading because of the leverage component, which may lose the investor more money than they held initially. Especially considering that cryptocurrencies are very volatile and unpredictable assets, the investor may have to provide extra funds to the collateral to avoid being forced to sell.
Investors start paying interest on the loan they took up to margin trade from day one, and the debt increases as the interest accrues. For this reason, margin trading is suited for short-term investments, as with interest to pay over the long period, the odds of making a profit are slimmer.
Risks associated with futures trading
The main risk associated with futures trading is the elevated leverage that investors can request with their already speculative positions. Typically, futures are allowed far greater leverage than their underlying assets, meaning they also face an increased risk of a margin call that could stretch the losses.
Coupled with the extreme volatility of the cryptocurrency market, the price of a futures contract may not favor the investor at the expiry date. Above all, beginners with little knowledge of markets and strategies should acquire some trading skills before venturing into either margin or futures trading, as they are speculative and risky investment tools.
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