Former employee of Consolidated Trading LLC Joseph Kim faces up to 20 years in prison for the fact that he lost more than $600 thousand of the company's funds during the margin trading on the crypto market. We figured out how margin trading works and what are the risks of this strategy for new crypto investors.
What is margin trading
Margin trading is one of the most profitable, but at the same time the most risky strategies. When margin trading, the crypto trader takes a loan from the broker, in the person of which the exchange most often acts, providing the amount of the collateral — the margin. At the same time, interest is charged for the use of the loan. But in this way, margin trading allows you to buy cryptocurrency for an amount exceeding the trader's balance. To make a deal, a trader has a margin account on the exchange, whose funds act as a guarantee to the creditor. A tool that allows you to trade amounts that exceed your own funds is called leverage.
The size of the maximum possible leverage is set by the exchange organizers. Leverage 1: 1 means that the trader can take as much as he has. A trader who has 1 bitcoin on his balance sheet will trade 2 bitcoins, increasing the potential profit. For example, the exchange Bitmex offers the ability to trade "shoulder" in the ratio of 100:1. Under such conditions, you can either multiply your balance for a few minutes, or immediately deteriorate. Trading with the shoulder is also offered by the exchange Bitfinex, CEX. IO GDAX.
There are two main options for margin trading: it is a long position, or a game of increase when a trader puts on the fact that the crypto asset will increase in price, and a short position, or a game of lowering when the rate goes on the fact that the price of the cryptocurrency will decrease.
Margin trading gives traders with little capital the opportunity to earn significantly more and do so in a shorter time. However, the risks associated with margin trading are much higher: if the price of a crypto asset goes down seriously when trading for an increase, then when it reaches a certain critical point, the trader may lose all his Deposit due to a margin call-forced closing by the broker of the transaction when a certain drawdown on it is reached, if the trader has not made additional funds to the account. If the borrowed funds are threatened, the exchange has the right to deduct the loss from the margin account Deposit.
However, there are cases when the traders who first had to face serious losses, decide to raise the stakes and win back their positions, instead of having to take losses. That often leads to even greater losses.
How Joseph Kim lost $ 600,000
This situation was faced by Joseph Kim, who lost more than $ 600,000 in two months of margin trading on the crypto market. However, Kim decided to close his losses at the expense of the company in which he worked — the firm Consolidated Trading LLC. When the crypto-market was at the stage of unprecedented growth, now the former employee brought cryptocurrencies from corporate wallets worth more than $2 million.
In September 2017, Kim decided to make money on the margin trading of cryptocurrencies. His strategy was to mess up bitcoin and maintain the margin level at the expense of the cryptocurrency of the company in which he worked. Kim started with small amounts, but the more he lost, the more the size of the next margin deal increased.
According to official data received by the Chicago court, the company was aware that from September to November 2017, Joseph Kim transferred 980 litecoins to his personal wallet, and then — another 55 bitcoins, of which Kim returned to the company only 27. However, during the investigation it became clear that in fact, in just over two months, Kim transferred 284 bitcoins, of which the company received back only 102. According to Kim, he conducted transactions with the company's cryptocurrencies for hundreds of thousands of dollars, hoping to make a profit and cover the borrowed funds:
"Until recently, I tried to correct the mistakes that I made. I can't believe I didn't stop when I had enough money to cover my debts. I'll have to live with it all your life."
The company managed to recover $ 1.4 million, which was available in the personal wallet of their former employee. However, $603 thousand remained irretrievably lost during Kim's unsuccessful deals. As a result, the court may sentence Joseph Kim to 20 years ' imprisonment.
The formation of the price of cryptocurrency — a multi-factor process
At the end of last year, an anonymous crypto trader also shared his experience, who, thanks to margin trading, was able to make 200 out of three bitcoins, guessing that the cryptocurrency will grow in price. However, as a result of a poorly planned strategy, he lost all his savings within one month when the bitcoin rate fluctuated. As noted by the trader, his example should serve as a lesson to those who trade using risky strategies with amounts that can change their lives.
Given that about 30% of Millennials between the ages of 18 and 34 prefer to invest in bitcoin than in traditional securities, before starting trading, experts recommend investing, understanding all the risks of such a volatile market, as well as beware of gurus and experts offering instant earnings schemes. As noted by Professor Cornell University Emin gun Sirer, first and foremost traders on the stock market is to stop listening to those who see the answers to questions about short trades with cryptocurrencies in the charts. According to the Professor, in order to understand how the price of cryptocurrency is formed, it is necessary to study a variety of factors, especially when it comes to short transactions and margin trading:
2 February
Emin Gün Sirer
@el33th4xor
For most people, this is their first big crypto market downturn. First, I'm sorry, but this high variation is why loves these assets. They're not Union Pacific, not Stores of Value. They move. Just as much down as up.
The question you're asking is: Why?
(Thread >>)
Emin Gün Sirer
@el33th4xor
Be wary of anyone who has an explanation. Disregard everyone who finds easy answers in charts. Ignore idiots with underground economy degrees who try to pass themselves as experts. And definitively let the trader/loser crowd inhabit bases, where they periodically get wiped/rekt.
16: 08 - 2 February. Two thousand eighteen
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Beware of those who offer an explanation. Do not pay attention to those who have found a simple answer in the charts. Ignore the idiots with the unfinished economic education, which build from a expert. And leave traders / losers in their cellars and with their periodic losses.
In the volatile cryptocurrency market, you need to be aware of the risks, analyze potential threats, make decisions with caution, and be prepared to lose 100% of your investment.
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