If you are a member of an exchange, you will surely come across the option to use spot trading or derivatives .
You can google them to get a deeper understanding, but I will explain them simply in a way that you as a user of them will need to know.
Spot trading f
Spot trading basically means you are buying the "asset" to own. So say you buy 1 BTC at $10,000, you now own this 1 Bitcoin forever as long as you don't sell it. It doesn't matter if Bitcoin's value goes to $0 or $1,000,000, you will still own one Bitcoin and can hold it forever and watch the price fluctuate.
Derivatives trading (aka futures trading)
This is similar to spot trading in that you can still buy 1 BTC at $10,000 but the difference now is you can borrow money to leverage your money, but the problem is you don't own the Bitcoin and you are agreeing to take on substantially more risk for potential higher returns. Depending on how many leverage multiples you borrowed, Bitcoin's price can only fluctuate so much in a loss before you lose your entire investment. In volatile world of Crypto, this can be very dangerous for your investment account if you don't use risk management.
How liquidation works
Liquidation happens during Derivatives trading when an exchange sells your position before they start losing money on loaning you money.
For Example :
Say your trading account has $1000 equity.
You buy 1 Bitcoin at the price of $10,000 per Bitcoin using 10x leverage.
With your $1000 of Margin, you now buy one whole Bitcoin because $1000 x 10 = $10,000. (the exchange provided $9,000)
If Bitcoin's price goes to $11,000 (+10%) then with only $1000 margin, you make $1000. (Doubled your money)
The problem is if it goes down -10% , then it hits your liquidation price and you lose ALL your margin ($1000).
Why is -10% a liquidation price?
Because when you have $1000 margin with 10x leverage , you are playing with $10,000. $1000 is yours, $9000 is the exchanges.
If $10,000 loses 10% of value, then it's worth $9,000 (-$1000 from before). Because the exchange is loaning you $9000, they don't want to lose any of their own money, and if you don't add any more money (margin) , then they will have to sell the $9,000 position before they start losing money. So the price right before they'd start losing money is the liquidation price.
How do you avoid liquidation?
The easiest way is to spot trade only. Because you own the asset, the price can fluctuate infinitely without liquidation.
If you buy at great prices zones like shown in the timing your investments section then you will maximize your gains in the long run.
If you're someone interested in day trading (futures trading), then you will have to learn how to tame the beast of leverage and use stop losses (a tool that sets a max loss per trade. Day trading (holding positions for hours, to days using leverage) is an extremely difficult skill to learn and I don't recommend it for 99% of people as there is no guarantee it will ever turn out profitable. You can make big wins one day, and lose more the next day if you aren't disciplined with your risk (stop loss and leverage) as the market is designed to mess with your emotions and there is incredibly unpredictable spikes in price in either direction that can liquidate your position. For traders, a 1% account max risk is highly recommended. That means if your account equity is $10,000 , then your stop loss is placed at the point where you'd lose $100 max.
Training with trading courses is highly recommended, and it can take years to master.
Also, day traders can attempt to take advantage of Crypto prices dropping by "Shorting" the market. That basically works the same way but you are betting that the price will go down (called "shorting" or "selling" the market or "bid"). So the trade only goes in profit for the trader if a $10,000 Bitcoin price goes down to $9,000 (-10% price) = (+$1000 profit).
Yes, that could happen, but because there is always a chance you are wrong, you'll win some and lose some, and many traders end up losing more than they make in the long run for many reasons.
Leverage multiples and how they work
The math - Divide 100 by the leverage multiple (5x for example) .
For example: 100% / 5 = 20% . Which means the price can drop 20% before your margin amount $1000, is liquidated and gone. But if it goes 20% in profit, then you will double your position.
1x leverage - Price can drop 100% before you get liquidated. 100/1=100% But it goes 100% in profit, you double your position.
2x leverage- Price can drop 50% before you get liquidated. 100/2= 50% But it goes 50% in profit, you double your position.
3x leverage- Price can drop 33% before you get liquidated. 100/3= 33% But if it goes 33% in profit, you double your position.
4x leverage- Price can drop 25% before you get liquidated. 100/4=25% But if it goes 25% in profit, you double your position.
5x leverage- Price can drop 20% before you get liquidated. 100/5=20%. But if it goes 20% in profit, you double your position.
10x leverage - Price can drop 50% before you get liquidated. 100/10= 10% . But if it goes 10% in profit, you double your position.
15x leverage - Price can drop 6.6% before you get liquidated. 100/15= 6.6%. But if it goes 6.6% in profit, you double your position.
25x leverage - Price can drop 4% before you get liquidated. 100/25= 4%. But if it goes 4% in profit, you double your position.
50x leverage - Price can drop 2% before you get liquidated. 100/50= 2%. But if it goes 2% in profit, you double your position.
100x leverage -Price can drop 1% before you get liquidated. 100/100= 1%. But if it goes 1% in profit, you double your position.
Conclusion
If you are following the "relaxed" course, you want to use spot trading as this will protect you from liquidation and allow you to actually own your Crypto and hold it for years whether it goes down 80% or increases 1000%. Yes, technically leverage can give you fast large returns, but as most traders find, that double edged sword can wipe huge gains on your account in a single trade. So therefore, in this course I suggest avoiding day trading.
Like there is professional video game players winning tournaments and making millions of dollars, the reality is that only a tiny, tiny amount of people who play video games accomplish making a living from it and that is not a recommended career choice for the general public, but if you feel you are going to be the one to beat the odds, you are free to do so but I've warned you that it isn't easy. In my first year in Crypto, I experimented with a ton of Defi projects, speculative low cap coins and while some of those plays were highly profitable, because I was so new, and reinvested those gains into more risky plays and lost those gains, it turns out if I had just invested all my money in Ethereum and HODL'd, I would have vastly outperformed the hundreds of hours winging it in the DEFI space (my first year of trading), I did learn a lot though and will carry those lessons into the future. Some people only learn from mistakes and avoid many warnings. You can be smarter and appreciate that you have the opportunity to learn from others and potentially save thousands of hours of time and lots of money.
You can google them to get a deeper understanding, but I will explain them simply in a way that you as a user of them will need to know.
Spot trading f
Spot trading basically means you are buying the "asset" to own. So say you buy 1 BTC at $10,000, you now own this 1 Bitcoin forever as long as you don't sell it. It doesn't matter if Bitcoin's value goes to $0 or $1,000,000, you will still own one Bitcoin and can hold it forever and watch the price fluctuate.
Derivatives trading (aka futures trading)
This is similar to spot trading in that you can still buy 1 BTC at $10,000 but the difference now is you can borrow money to leverage your money, but the problem is you don't own the Bitcoin and you are agreeing to take on substantially more risk for potential higher returns. Depending on how many leverage multiples you borrowed, Bitcoin's price can only fluctuate so much in a loss before you lose your entire investment. In volatile world of Crypto, this can be very dangerous for your investment account if you don't use risk management.
How liquidation works
Liquidation happens during Derivatives trading when an exchange sells your position before they start losing money on loaning you money.
For Example :
Say your trading account has $1000 equity.
You buy 1 Bitcoin at the price of $10,000 per Bitcoin using 10x leverage.
With your $1000 of Margin, you now buy one whole Bitcoin because $1000 x 10 = $10,000. (the exchange provided $9,000)
If Bitcoin's price goes to $11,000 (+10%) then with only $1000 margin, you make $1000. (Doubled your money)
The problem is if it goes down -10% , then it hits your liquidation price and you lose ALL your margin ($1000).
Why is -10% a liquidation price?
Because when you have $1000 margin with 10x leverage , you are playing with $10,000. $1000 is yours, $9000 is the exchanges.
If $10,000 loses 10% of value, then it's worth $9,000 (-$1000 from before). Because the exchange is loaning you $9000, they don't want to lose any of their own money, and if you don't add any more money (margin) , then they will have to sell the $9,000 position before they start losing money. So the price right before they'd start losing money is the liquidation price.
How do you avoid liquidation?
The easiest way is to spot trade only. Because you own the asset, the price can fluctuate infinitely without liquidation.
If you buy at great prices zones like shown in the timing your investments section then you will maximize your gains in the long run.
If you're someone interested in day trading (futures trading), then you will have to learn how to tame the beast of leverage and use stop losses (a tool that sets a max loss per trade. Day trading (holding positions for hours, to days using leverage) is an extremely difficult skill to learn and I don't recommend it for 99% of people as there is no guarantee it will ever turn out profitable. You can make big wins one day, and lose more the next day if you aren't disciplined with your risk (stop loss and leverage) as the market is designed to mess with your emotions and there is incredibly unpredictable spikes in price in either direction that can liquidate your position. For traders, a 1% account max risk is highly recommended. That means if your account equity is $10,000 , then your stop loss is placed at the point where you'd lose $100 max.
Training with trading courses is highly recommended, and it can take years to master.
Also, day traders can attempt to take advantage of Crypto prices dropping by "Shorting" the market. That basically works the same way but you are betting that the price will go down (called "shorting" or "selling" the market or "bid"). So the trade only goes in profit for the trader if a $10,000 Bitcoin price goes down to $9,000 (-10% price) = (+$1000 profit).
Yes, that could happen, but because there is always a chance you are wrong, you'll win some and lose some, and many traders end up losing more than they make in the long run for many reasons.
Leverage multiples and how they work
The math - Divide 100 by the leverage multiple (5x for example) .
For example: 100% / 5 = 20% . Which means the price can drop 20% before your margin amount $1000, is liquidated and gone. But if it goes 20% in profit, then you will double your position.
1x leverage - Price can drop 100% before you get liquidated. 100/1=100% But it goes 100% in profit, you double your position.
2x leverage- Price can drop 50% before you get liquidated. 100/2= 50% But it goes 50% in profit, you double your position.
3x leverage- Price can drop 33% before you get liquidated. 100/3= 33% But if it goes 33% in profit, you double your position.
4x leverage- Price can drop 25% before you get liquidated. 100/4=25% But if it goes 25% in profit, you double your position.
5x leverage- Price can drop 20% before you get liquidated. 100/5=20%. But if it goes 20% in profit, you double your position.
10x leverage - Price can drop 50% before you get liquidated. 100/10= 10% . But if it goes 10% in profit, you double your position.
15x leverage - Price can drop 6.6% before you get liquidated. 100/15= 6.6%. But if it goes 6.6% in profit, you double your position.
25x leverage - Price can drop 4% before you get liquidated. 100/25= 4%. But if it goes 4% in profit, you double your position.
50x leverage - Price can drop 2% before you get liquidated. 100/50= 2%. But if it goes 2% in profit, you double your position.
100x leverage -Price can drop 1% before you get liquidated. 100/100= 1%. But if it goes 1% in profit, you double your position.
Conclusion
If you are following the "relaxed" course, you want to use spot trading as this will protect you from liquidation and allow you to actually own your Crypto and hold it for years whether it goes down 80% or increases 1000%. Yes, technically leverage can give you fast large returns, but as most traders find, that double edged sword can wipe huge gains on your account in a single trade. So therefore, in this course I suggest avoiding day trading.
Like there is professional video game players winning tournaments and making millions of dollars, the reality is that only a tiny, tiny amount of people who play video games accomplish making a living from it and that is not a recommended career choice for the general public, but if you feel you are going to be the one to beat the odds, you are free to do so but I've warned you that it isn't easy. In my first year in Crypto, I experimented with a ton of Defi projects, speculative low cap coins and while some of those plays were highly profitable, because I was so new, and reinvested those gains into more risky plays and lost those gains, it turns out if I had just invested all my money in Ethereum and HODL'd, I would have vastly outperformed the hundreds of hours winging it in the DEFI space (my first year of trading), I did learn a lot though and will carry those lessons into the future. Some people only learn from mistakes and avoid many warnings. You can be smarter and appreciate that you have the opportunity to learn from others and potentially save thousands of hours of time and lots of money.
Thanks for reading. Feel free to comment your thoughts or ask questions below.