Recently, there has been a lot of hype and publicity about margin trading as many cryptocurrency exchanges have implemented it on their platforms. Before now, margin trading was associated mainly with the commodities, forex, and stock market. In this article, we present a basic understanding of cryptocurrency margin trading, how it works, exchanges involved and its features.
What is Cryptocurrency Margin Trading?
Margin trading is a method of trading assets using funds borrowed from third parties. It allows traders to increase their profits by leveraging higher positions. Regular trading allows a trader to buy/sell crypto assets using his/her funds. However, margin trading is designed such that the trader uses his/her funds as collateral to leverage higher positions.
For instance, if a trader has $1,000 for a trade, he can increase his position to $5,000 on 5x leverage. Bitmex, for example, provides up to 100x leverage for BTC markets. This means that the trader can increase his position to $100,000.
Although margin trading helps to amplify trade that results in higher profits, it also can increase losses. The cryptocurrency market is highly volatile. Thus, risk management strategies must be implemented.
Terms associated with Cryptocurrency Margin Trading
The following are different keywords used in the cryptocurrency margin trading marketplace.
1. Margin Loan: This refers to the loan lent to a trader from the exchange or other traders to be able to carry out margin trading activities.
2. Leverage: This is the multiplier amount a trader benefits from to enter a trade. It starts from 2x as high as 100x. The higher the leverage, the bigger the potential profit and increased risk.
3. Maintenance Margin: This is the minimum amount of equity that must be maintained in your margin account. Once this amount is breached, the exchange can liquidate your position to recover funds.
4. Liquidation Price: The price set to sell a position when the maintenance margin is breached, is referred to as the Liquidation price.
Advantages of Cryptocurrency Margin Trading
So far, in this review, we have provided fundamental insights into cryptocurrency margin trading. So, let's outline a few of its advantages.
1. Increased Profits: Margin trading provides traders with the needed leverage to increase their potential gains. A trader can have access to as much leverage as he wants dependent on the maximum offered by the exchange. Some exchanges offer up to 100x; thus, if you're looking to increase your profits with limited capital, margin trading is a good option.
2. Shorting: The cryptocurrency market is volatile. However, traders can short cryptocurrencies and make profits off it even when its value dips.
Disadvantages of Cryptocurrency Margin Trading
Although margin trading is a lucrative opportunity, it has its downsides. These include;
1. Accelerated Losses: A trader can easily make huge losses as when compared to regular trading. This is because the losses are calculated with the margin loan in view. If not well handled, it can lead to a massive depletion of your trading capital.
2. Fees: Unlike regular trading, there are different kinds of fees incurred in margin trading, i.e., taker fees & maker fees. These fees are charged alongside interest on the margin loan received for trading.
3. High Risk: Margin trading is a risky adventure, and it is not an advisable trading method for newbies.
Cryptocurrency margin trading is an adventure that offers more lucrative profits. You can increase your potential earnings with the availability of exchanges which provide high leverages. However, it is vital to trade with caution, learn to manage risks and invest what you can readily lose.