Challenges with Low Cap Instruments

Leverage trading in low cap instruments (assets with low market capitalization) is fraught with unique challenges:

  1. High Volatility: Low cap instruments are more volatile, which, when combined with leverage, significantly increases the risk of large losses.

  2. Liquidity Issues: These assets often have lower liquidity, making it difficult to enter or exit positions quickly in a rapidly changing market.

  3. Market Manipulation Risks:

    • Exploitation Potential: Small market sizes and lower trading volumes make low cap instruments more susceptible to market manipulation. Traders with large positions might influence the market price to create artificial movements.

    • Impact on Brokers: Brokers offering leverage on these instruments face increased risks. If a manipulation leads to severe price drops, traders may not cover their losses, leading to financial strain on the broker.

    • System Exploitation: Savvy traders might exploit these vulnerabilities, leading to unfair market practices and potential regulatory scrutiny.

  4. Limited Leverage Availability: Due to these risks, brokers may be more cautious in offering high leverage on low cap assets.

Additional Issues With Low Cap Crypto Tokens

  1. High Gas Fees: Transactions involving low cap tokens, especially on networks like Ethereum, can incur high gas fees. These fees can significantly eat into potential profits, especially in high-frequency trading scenarios.

  2. Tax on Transfers: Some low cap tokens might have transfer taxes as part of their protocol, which can reduce the amount received in each transaction. This tax can make it costly to move in and out of positions.

  3. Borrowing Costs: Leveraging involves borrowing funds, which comes with its own costs. These costs can be particularly high for low cap tokens due to their perceived higher risk.

  4. Price Manipulation through Pump and Dump: Low cap tokens are more susceptible to price manipulation. Traders might borrow funds to artificially inflate the price (pump) and then sell (dump) their holdings for a profit, impacting the token’s value and market stability.

By now you might have understood why leverage trading in low cap cryptocurrencies hasn't been available till yet ,

Read next how we tackled these challenges and made leverage trading on low cap tokens available-

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