How Does Margin Trading Work? - Crypto Margin Trading, Explained
A lot of people ask, how does margin trading work? Crypto trading is a bit hard as it is, and sometimes, it's hard to make a profit. With margin trading, you can make earnings a lot faster than normal trading. However, margin trading is also a double-edged sword. If you lose on your trades, it also feels twice as heavy. Let's look at how does margin trading work crypto and how it can be applied to crypto trading.
Margin trading is basically a loan that lets you trade using funds you don't own. The exchange platform lets you borrow some funds for trading. Most exchange platforms allow margin trading through their margin trading accounts. All you need to do is open a margin trading account on the exchange platform, put in some money as collateral then the exchange platform lets you borrow an extra amount for trading. Some allow borrowing of up to 100% of the collateral amount. It's true that margin trading has a higher rate of profit, but it also comes with a higher risk. Now let us look exactly at how does margin trading work crypto currency markets and how it is computed.
Margin Trading Computation
Let us show a sample computation to demonstrate how does margin trading work crypto assets. The initial amount of crypto asset you have is worth $1000. You placed it as collateral and got $2000. If you earn a gross profit of $3000, meaning your investment grew 50%. After paying your remaining balance of $1000 plus interests, your net profit is around 2000 meaning your final profit increased your initial money by ~100%.
If you just invested your original $1000 and your investment grew the same amount, which is 50%, your net profit will be $1500. You really will earn more through margin trading.
On the flip side, if your investment made you lose money, the money lost would also double. Let's take the last sample in this scenario. The initial amount of crypto-asset you have is worth $1000. You placed it as collateral and got $2000.
If your investment loses a bit of value and you sold it before you incur more losses. Let's say you sold it at $1500 value. Your gross profit percentage is -25%. After paying the remaining $1000 balance plus interests, your net profit is now around $500. You lost 50% of your initial money of $1000. If you invested your initial capital and lost the same percentage, which is -25%, your net profit would be $750.
Binance Margin Trading
Some platforms have different ways of treating margin trading accounts. In Binance, a cryptocurrency exchange platform, they let you borrow twice the amount of your money, and they don't get your money as collateral. So, you trade with a higher amount. The downside is its risk is relatively higher than the first type of margin trading. Let's take a look at a sample computation.
You have 0.01 BTC, and you entered it into your margin trading account. You borrowed in the margin trading account in Binance and got the total amount you can borrow, which is 0.02 BTC. The borrowing interface also shows the current applicable interest rate during the time you borrowed the crypto assets. Now you have a total of 0.03 BTC, but you also have a 0.02 BTC debt plus interest.
You may be asking how does margin trading work crypto investments? Wondering how you can assess risks in trading.
They also have margin levels that assign your account at a risk level, which changes depending on your crypto asset's market movement. The first level to watch for is the 1.3 risk level. If you reach this risk level, you will receive a margin call. This means that you should increase your collateral or pay some amount from your loans.
If the risk level of your account reaches 1.1, they automatically liquidate your account. When this happens, Binance will automatically sell your cryp
to assets at market price to repay your loan. Basically, the risk level calculates your total holdings if you can still pay your loan. If this scenario happens, you will be charged additional fees.
Paying Your Loans
After you traded with your crypto using your margin trading account's total balance, it is now time to pay your loans. Let's look at a sample scenario. You traded your Bitcoin (BTC) for another crypto asset, let's say Binance Coin (BNB). If the BNB price climbed up and you sell it at a higher price, you made some profits.
It's time to pay your loan. For example, let's assume that after selling your BNBs for some BTCs, your final BTC balance is around 0.04 BTCs. So, from 0.03 BTC to 0.04 BTC, meaning the percentage of your trade income is 33%. You pay your loan of 0.02 BTC plus interests. The final amount you will arrive with is approximately 0.02 BTC meaning your initial 0.01 BTC becomes ~0.02 BTC making your earnings 100% of your initial assets.
If you lose on the trades you made, refer to the margin levels that can make you increase your collateral or pay some of the loans to continue trading or lose all your money from the liquidation process. Learn more about crypto margin trading here!
Margin trading can be quite profitable. It can make you earn faster than outright trading with your money. But you have to be wary of its downsides too. You can also lose money more quickly than trading your money without margins. It all boils down on your decisions and hoping that it is right. Hopefully, you now understand how does margin trading work crypto markets. Crypto trading will now be easier for you to conquer.
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