- CoinDCX has now adopted dynamic algorithms Margin
- Dynamic margin trading helps traders better manage the risks associated with trading leveraged financial products, particularly in times of market illiquidity and high volatility.
- Market volatility and trading volume of the last 7 and 90 days have been taken into consideration while bucketing the different cryptocurrency pairs.
Introduction – Why is liquidity an important measure while trading?
Liquidity is an important measure when it comes to trading in the financial markets as it helps to describe how easy it is for an investor to convert their assets into cash. In terms of cryptocurrencies, liquidity refers to how easy it is for the investor to convert their coins into other coins or cash. Traders and investors experience a price change when trading in a market of low liquidity. This is because not everyone is willing to buy or sell at a price that traders prefer.
At the time of writing, there are more than 250+ cryptocurrency pairs being traded on CoinDCX but not all tokens have the same level of liquidity. Tokens having low liquidity levels have high levels of volatility causing the price to fall and rise quickly. This can be visualized when we check the candlesticks of different cryptocurrencies. Cryptocurrencies with low levels of liquidity tend to have longer spikes in their prices while tokens of high liquidity have less volatility or fluctuation in their transaction price.
In our blog on trading volume and its implications on the price of a cryptocurrency, we had mentioned how the volume helps to determine the market liquidity, its volatility, and the strength in the market. Also, buying and selling cryptocurrencies in a liquid market is relatively easier and more profitable as the traders get less slippages on the prices at which they trade. The higher the liquidity, the greater are the chances of finding a suitable buyer or seller at the price that you would like to trade. This is not possible in the case of a less liquid market.
We have seen traders suffer huge losses when large orders get executed causing large swings in the price. High liquidity ensures stability in the prices while also supplementing greater accuracy in technical analysis as the charting and formations are more developed and precise.
CoinDCX’s approach to a Dynamic Margin Product
Cryptocurrencies on the Margin product have so far had a fixed level of leverage that were evaluated based on liquidity, trading volume, price volatility and other related factors. The adjustments in the margins were slow and not real time resulting in minor losses for our traders. In order to provide the users with a better trading experience and risk-managed platform, we have decided to move to a more dynamic margin product. The maximum leverage offered in a market now depends on the liquidity, trading volume, price volatility, and other necessary factors. All trading pairs have been clubbed based on the different volumes and their volatility in the market.
In order to ensure that our product is truly dynamic, we have considered rolling 7 and 90-day average daily volume of each market and calculating an entity (hereinafter referred to as ADV [7, 90]) by giving equal weightage to rolling 7 and 90 ADV of each market. The volatility has been calculated based on the returns for 1-minute candles for the last hour.
Volatility, as mentioned above, is the standard deviation of the percentage returns of 1-minute candles of the last one hour. Thereafter, ADV [7, 90] and Volatility are normalized and brought to a scale of 0 to 100. Market with the highest ADV will have normalized value as 100 while with lowest ADV will have normalized value of 0. Similarly, markets with the lowest volatility and highest volatility will normalized values as 0 and 100 respectively.
Once this was done, all the different trading pairs were bucketed into categories based on the normalized score of volume. The categories as mentioned below –
- a) Ultra Low Volume
- b) Low Volume
- c) Medium Volume
- d) High Volume
Following the categorizations based on volume, we then categorize the pairs based on their normalized volatility as it is this volatility that is a clear reflection of the price swings of a crypto-crypto pair. The pairs can be categorized into 4 categories:
- a) Ultra Low Volatile
- b) Low Volatile
- c) Medium Volatile
- d) High Volatile
Different volume categories have different ranges of leverages, for eg. markets falling in the category of “High Volume” will have leverage between 7 – 10X, while the exact leverage in this particular category will depend on the recent volatility of the market. Lower the volatility, higher the leverages.
|ADV [7 ,90]||Leverage Range|
|Ultra Low Volume||1X|
|Low Volume||2 – 3X|
|Medium Volume||4 – 6X|
|High Volume||7 – 10X|
CoinDCX has adopted an automated algorithm for the dynamic margin trading product to help traders manage their risks in situations where the trading volume is low, volatility is high, and the markets are illiquid.
Read More – Now Short 33 New Cryptos on CoinDCX’s Margin
CoinDCX aims to make Margin, our margin trading platform, more dynamic. Dynamism is introduced on the platform by setting different leverages for different tokens based on their prices, liquidity, and trading volume. CoinDCX does not manually enter the level of leverage in the different markets on Margin. We resort to an automated algorithm and process that keeps updating the leverage for each cryptocurrency pair. Having a dynamic margin product helps traders better manage the risks associated with trading leveraged financial products, particularly in times of market illiquidity and high volatility. This is a common practice followed in major financial markets that provide features of leverage trading.