When using Cryptobots for trading, it's important to understand how different strategies handle potential losses. The bot's exposure to losses depends on the type of trading strategy employed: spot or derivatives.
Spot vs. Derivatives Trading Losses
Cryptobots utilize both spot and derivatives strategies, each with distinct characteristics regarding potential losses:
Spot Strategies: These strategies do not incur permanent or impermanent losses. Any potential "losses" from spot strategies are solely due to the devaluation of the underlying asset itself, which is not an issue caused by the bot's execution.
Derivatives Strategies: Derivatives strategies, such as linear and inverse perpetuals, can experience losses. These losses primarily occur in the form of position liquidation if the account's margin is insufficient to cover a drawdown.
Understanding Derivatives Liquidation
Liquidation in derivatives strategies happens when the value of the collateral, or margin, falls below the required level. This often occurs with inverse derivatives strategies due to the effects of convexity, where the margin reduces as the collateral value decreases.
However, losses are not inevitable. Users have options to manage risk and prevent liquidation:
Reduce Position Size: Decreasing the size of the trading position can lower margin requirements and reduce liquidation risk.
Replenish Margin: Adding more funds to the account's margin can push the liquidation price further away, providing a larger operational window.
Important: Collateral health is ultimately the user's responsibility. Proactive margin management is key to avoiding liquidation.
Cryptobots' Robust Risk Management
The Cryptobots system is designed with robustness against liquidation events. We implement measures to significantly reduce the probability of such occurrences:
Limited Leverage: No position ever exceeds 1.0x the account's initial balance. This low leverage greatly reduces the chances of liquidation. For instance, the maximum leverage set for inverse Bitcoin bots is 1.0x, and 1.0x for Ethereum and Solana bots.
Operational Window: For inverse derivatives strategies, this limited leverage provides users with an operational window of over 45% from the break-even price before a margin call might occur due to convexity effects, not strategy execution shortcomings.
This robust system design is a key reason why Cryptobots has successfully endured various price actions for over five years straight.
Preventing Liquidation: Your Role
There is no scenario where you would get liquidated, as long as you are able to add margin to the trade to push the liquidation price away in the improbable scenario where it might be needed. It's important to note that in this case, the lower the initial leverage, the less money it would take to push the liquidation price away.
These parameters are carefully set based on the historical volatility of the assets traded.