What Is Margin Trading Cryptocurrency? – A Basic Guide
Margin trading is naturally riskier than regular trading. However, the risks are even higher when we're talking about cryptocurrencies. Trading cryptocurrencies may be simple and easy, but if you are looking for a more advanced type of trading, this is where margin trading comes in. Margin trading will also expand your gains from market fluctuations and allow you to perform more involved and active trading strategies. Keep on reading this article to know what is margin trading cryptocurrency and how it works.
What Is Margin Trading in Cryptocurrency?
If you're new to trading, attempting to understand the complex world of cryptocurrency margin trading will overwhelm you. Suppose you have ever tried running a quick search on margin trading cryptocurrency and how it works. In that case, you may have been presented with an extensive glossary of terminologies like leverage, liquidation price, shorting, margin calls, and so on.
The basics of crypto margin trading are pretty much straightforward, though. So, what is margin trading in cryptocurrency? Simply put, a cryptocurrency margin trade allows any trader to "borrow" capital to obtain higher buying power and open positions that are larger than the real account balance. Aside from borrowing money, it also involves taking a stand on whether or not the value of crypto will rise or fall.
It is a trading practice that will allow traders to obtain greater exposure to a specific asset by using capital from other traders as an exchange. Unlike regular trading, where traders can use their fund trades, margin trading enables traders to multiply the amount of capital they can trade.
Aside from learning what margin trading cryptocurrency is, you should also be familiar with other terms. Margin trading is also attributed to "leverage trading." Leverage means the amount by which any trader can multiply their position. For example, a margin trader who opens a trade with 100x leverage can multiply their exposure and possible profit by 100x.
Margin trading may seem promising at first glance - the capability to multiply profits by 100x will catch any trader's attention. However, there is always a downside, especially in margin trading Bitcoin. Using leverage in Bitcoin trading to expand your position will increase risks.
Aside from asking what is margin trading cryptocurrency, the biggest question is, can you lose it all, though? If you can multiply your profits 100x, can you also lose it all?
Luckily, the increase in risk when you are doing margin trading cryptocurrency is not in proportion to leverage. For example, if you're trading with 100x leverage, this won't multiply your losses to 100x as it is not usually probable to lose more than you initially committed to the trade.
Margin trading is very popular in slow-moving, low volatility markets like Forex, but it has become more popular in fast-moving markets like cryptocurrency.
How It Works
Positions that are opened by any crypto trader are generally divided into two varieties:
- Long — where the user assumes the increase in the price of an asset;
- Short — where the user assumes the price to fall.
In any case, the cryptocurrency's value goes in the path predicted by the trader, the profit that he will get on trade will increase the proportion of the selected leverage.
When such a position is closed, the collateral body will return to the creditor (exchange) with commissions. The remainder of the income earned is credited to the account of the user.
Suppose you deposited $1000 to the exchange and offer this service. You open a Bitcoin long position with a 10x leverage; the open position will be $10000 (the amount that will be available to the trader will increase 10x). If the price increases by 1%, the profit will be calculated from the deal's total amount, i.e., it'll make $100. The trader's total balance at closing the position will be $1100 (net with commissions and payments defined by the rules). If there's no leverage, the profit will only be $10.
Aside from commissions for opening and closing transactions, other platforms may also have a so-called financing rate paid to each other by long and short position holders. It depends on the number of open positions of each type.
Margin Trading Tips
If you want to become a pro in leveraged trading and minimize the dangers of losing your deposit, always keep in mind that crypto trading is a type of credit you have to repay with the established commissions' payment or the body deposit's loss. This way, you will keep yourself from using the entire deposit to trade or taking too much leverage.
Carelessly opening trades with leverage without a deep level of trading skills will most definitely lead to deposit loss.
TIP: Your choice for margin trading cryptocurrency assets must be made according to a volatility analysis. In opening a trade, we recommend that you choose periods when there's the least possibility of drawdowns and pumps - price jumps in various directions, with the aid of which the market maker attempts to beat out as many traders as possible.
TIP: Margin trades for your reference have time limits. If you can’t perform your trade-in time, the portion of your trade that's leveraged will automatically settle.
TIP: Margin trading works almost the same way on stocks. However, if the exchange will allow you to leverage using a long or short position in both cases, the short position may be very risky, especially on margin trading, but it can also serve as a hedge.
TIP: If you're going to contemplate a coin's price using margin trading, be sure to review first the technical analysis concepts like RSI. Speculating blindly with leveraged positions may be a disaster; even professionals will caution you on it.
If you are deciding or thinking of getting yourself in margin trading, you must know the basics like what is margin trading cryptocurrency, how it works, and things to consider. Only this path will lead you to a stable profit from trading with cryptocurrencies over time. Do not rush, and learn and master the basics first for you to reap the positive results of margin trading in the crypto world. Learn more about cryptocurrency trading here!
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