Investment in Bitcoin : How to Manage Risk and Make Profits?

Margin trading in the cryptocurrency market requires the use of capital borrowed from the broker, which increases the purchasing power of investors. The investor’s own capital is used as “margin” to open larger positions through what is known as “leverage”, giving investors the ability to take larger positions compared to regular trading using only their own money. This strategy enables cryptocurrency investors to benefit from the large and rapid market fluctuations that characterize this sector, allowing them to increase their exposure to these fluctuations and realize potential profits.

In terms of margin management, cryptocurrency investors have great flexibility in managing their positions when they are opened, as they can respond to margin alerts in different ways, such as increasing collateral by depositing additional margin or closing positions. When liquidating, investors can choose between two types of margin:

– Isolated margin: allocated to only one position, ensuring that potential losses do not affect the rest of the portfolio.

– Cross margin: allows margin to be shared between several positions, where a loss in one position can be offset by profits from other positions, creating an integrated strategy for mitigating risk.

These options give investors greater flexibility to effectively manage their portfolios and financial strategies.

Risk Management in Margin Trading

Investors should understand that margin trading not only increases potential returns, but also increases the amount of risk and loss. Therefore, it is essential to integrate margin trading into a well-thought-out and integrated investment strategy when investing in cryptocurrencies.

Although margin may seem risky, there are effective strategies that help investors maintain a balance of risk and return. Among these strategies comes the role of stop-loss orders, which are automatic orders to sell or buy assets when the market reaches a specific price, which helps limit potential losses.

The Importance of Stop Out Ratio in Bitcoin Trading and Risk Management

The Stop Out Ratio (SOR) is a very important metric for traders and investors in the cryptocurrency market, including Bitcoin. It refers to the percentage of margin that is used before the broker automatically closes your open positions. A high stop out ratio indicates that your account is about to be liquidated, while a low ratio indicates that there is more margin.

Key Points About Stop Out Ratio for Bitcoin Investing:

  1. Understanding Stop Out Level:

– The stop out level is the limit at which a broker will close your open positions to prevent further losses. This level can vary between brokers, and is often set at around 50-100% of your used margin.

  1. Margin Trading:

– When trading Bitcoin on margin, the stop out ratio becomes extremely important. If the price of Bitcoin drops significantly, and your equity falls below the stop out level, your positions may be liquidated.

  1. Risk Management:

– Investors should actively monitor their stop out ratio and use stop loss orders to effectively manage risk. This ensures that your losses are limited even in volatile markets, such as cryptocurrencies.

  1. Impact of Volatility:

– The price of Bitcoin is notoriously volatile. A sudden price drop can trigger a quick stop out if your account has high leverage. Traders should pay attention to their leverage ratio to maintain a comfortable stop out ratio.

  1. Broker Policies:

– Always check with your broker regarding their stop loss ratio policies. Different brokers may have different margin requirements and criteria, which can affect how you manage your Bitcoin investments. Ultimately, monitoring your stop loss ratio is vital to managing risk in Bitcoin trading. It helps you understand how much margin you have left and how close you are to having your positions automatically closed.

How to Calculate Profit in Bitcoin Contract Trading: A Comprehensive Guide

It is important to note that unrealized profits and losses are calculated based on the fair price, while realized profits and losses are calculated based on the last price.

Calculating Profit and Loss for BTC Contracts with Leveraged Trading (BTCUSD)

BTC contracts with leverage are valued, secured, and settled in Bitcoin, making it the base currency used in transactions. Each of these contracts represents 100 USD, which means that USD is the counter currency.

Let’s say you buy 100 BTC perpetual contracts at $50,000 per contract, which means you are investing a total of $10,000. In this case, you would sell $10,000 to buy the same amount of Bitcoin, i.e. 0.2 BTC (10,000 / 50,000).

If the price of Bitcoin rises to $55,000 and you want to secure your profits, you can close the position by buying back $10,000 worth of contracts, while simultaneously selling the equivalent amount of Bitcoin, i.e. 0.1818 BTC (10,000 / 55,000).

Thus, your profit is calculated as follows:

Your profit = BTC amount at entry – BTC amount at exit

Your profit = 0.2 – 0.1818 = 0.0182 BTC

In short, the formula for calculating the profit and loss is:

The formula for calculating the profit and loss:

(1 / Futures entry price) – (1 / Futures exit price) × Trade size

Example:

(1 / 50,000) – (1 / 55,000) × (100 × 100) = 0.0182 BTC

Example of a short trade:

When selling the BTCUSD 0925 quarterly contract (buy USD and sell BTC):

The formula for calculating the profit and loss:

(1 / Futures entry price) – (1 / Futures exit price) × (Trade size × -1)

Example:

(1 / 50,000) – (1 / 45,500) × (100 contracts × 100 USD × -1) = 0.0198 BTC