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What is Cross Collateral

August 26, 2021

EQONEX

EQONEX adds Cross Collateral functionality.
EQONEX has added Cross Collateral functionality, which offers traders on the exchange multiple benefits.

Cross Collateral offers more flexibility as to how you fund your Total Account Margin. EQONEX is a USDC based platform, and without Cross Collateral enabled, only USDC and USD will contribute to your Total Account Margin. Meaning that if you don’t have any USD or USDC, you can not trade any margined products without selling some of your other assets first.

With Cross Collateral enabled, you can use those other assets directly, and there is no need to convert them to USD.

The benefits of Cross Collateralization

Cross Collateral offers traders significantly more flexibility, allowing them to take advantage of multi-layered trading and investment strategies. For example, with Cross Collateral, a trader can use BTC to trade margined products such as Perpetuals rather than first convert it to USDC, allowing them to keep their long-term exposure to BTC while executing short-term trading strategies. 

Of course, if traders fall below the maintenance margin and fail to deposit funds in time, part of their BTC holdings may be liquidated to cover the loss. Therefore, it’s not a risk-free strategy. 

Managing risk with Cross Collateralization

Although cross collateralization provides traders with more flexibility, there are also some risks involved. If a trader has many open positions, they can quickly lose sight of the big picture. So, ensure that you are always aware of how any given market movement could impact your overall margin. 

The cryptocurrency markets can move very quickly, and particularly if you hold a lot of shorts, the loss potential is infinite—as the Wall Street hedge funds found out when the Wall Street Bets Redditors went on a trading rampage in January. 

Similarly, plenty of cryptocurrency traders taking advantage of the industry’s famously high leverage have found out the hard way what happens when the markets move violently. Leverage is an attractive tool because it allows traders to magnify their gains. However, the flip side is that it can also magnify losses. Therefore, traders should use leverage with caution. 

It’s also sensible to ensure that you have a healthy reserve of collateral to avoid liquidation in the event of sudden volatility. While traders in the traditional markets can rely on periods of inactivity when trading floors are closed, the crypto markets move 24/7, so having the cushion of a reserve will make it easier to sleep at night. 

In general, the benefits of cross collateralization far outweigh the risks for sensible traders. By taking appropriate precautions to avoid being liquidated, cross collateralization can be used to help boost liquidity and reduce their overall risk exposure. 

Sign up to EQONEX today to use cross collateralization.

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