What Is Crypto Margin Trading And How Does It Work?

May 18, 2021 leave a comment

There are several ways for trading cryptocurrency. New cryptocurrency traders often get overwhelmed by hearing technical terms such as HODL, “shorting” Bitcoin, forking, crypto margin trading, crypto trading with leverage, FOMO, etc… thrown around. Here, shorting and trading with leverage refers to the same thing: Crypto Margin Trading. Margin trading is not by any means a new concept. It has been practiced in traditional finance and stock markets since long ago. There, margin trading is the method of using borrowed funds from a broker to buy a financial asset. That financial asset will serve as the collateral to the broker. But how does this translate to the world of cryptocurrencies? What is Crypto Margin Trading? How does it work? Let’s have a look.

What is Crypto Margin Trading?

The basics of margin trading in cryptocurrency are similar to those in traditional finance. Like most investments, the profit made from crypto trading depends on the amount invested into it. And many people can’t afford to invest a significant amount of money in cryptocurrencies. This is where margin trading is used. A margin trader borrows capital to boost his purchasing capacity in the crypto market. Capital can be borrowed from brokers or margin lenders. To borrow capital from brokers or margin lenders, you have to commit an initial deposit and open a position in crypto. You are also required to maintain a specified amount in your account to keep your position. While trading on a lending platform, your initial deposit will be retained as collateral. The amount you receive for margin trading will be dependent on the lending platform and the initial deposit.

Margin trading gives you the potential to earn huge profits. But it multiplies the risk involved as well considering the volatile nature of cryptocurrencies. Margin trading can deliver enormous loss or success to your portfolio.

Also Read How to Start Cryptocurrency Trading Platform – A Step by Step Guide Services

Going Short, Going Long, Margin Calls and Liquidation

In crypto margin trading, you’ll usually be presented with two options: going short or going long. By going long, the trader expects the price of a crypto asset to increase soon. Going short is the contrary. When the trader is going short, they are betting that the price of that crypto asset is going to fall. Traders going short are usually trying to salvage profit from failing crypto assets.

When you borrow money for margin trading from a broker or lending platform to trade in crypto assets, they take measures to minimize their risk of losses. So when the market goes against the position taken by you, the lending platform could ask you to raise your collateral so that their status is safe. This is known as a margin call. It is implemented by lending platforms when the value of the cryptocurrency falls below a certain amount.

But if the level of margin falls beneath a specific amount, the platform could close your position and relinquish the initial deposit. This is called liquidation of the trade. A broker or lending platform will liquidate a trade to guarantee that any more money is not lost beyond the initial margin.

Pros and Cons of Crypto Margin Trading

Crypto Margin Trading could yield ample profits, broaden your positions, leverage higher funds, and enable you to master more trading tactics. The profits could be immense because of the higher capital invested. Margin trading is good for diversifying your portfolio. Traders can divide their investments into various assets with small investments in each.

But crypto margin also involves challenging elements such as higher risks, the potential of significant losses, and the extreme volatility of crypto prices. Unlike conventional trading, margin trading could result in more loss than the initial investment. Even slight fall prices may cause significant losses.

Crypto Margin Trading Tips

Margin trading is regarded as a high-risk strategy and not to be tried by inexperienced traders. But crypto margin trading can also make you enormous profits. When done skillfully, you can gain 100x more profit than regular financial trading. Profits can even be made when the price of cryptocurrency dips by going short on it.

So here are some tips to keep in mind while margin trading crypto.

Start small and increase gradually

This is the best strategy if you are inexperienced in margin trading. It’s always advised to start with a modest position and smaller collateral.

Set your goals

It’s necessary to have a clear plan to profit, an exit strategy, and most importantly, follow the plan. Have an exit plan and set proper stop-loss levels. Stop-loss levels can be set to automatically sell off or buy assets if the price reaches a certain level.

Check the fees and interest

Lending platforms or brokers that facilitate margin trading do not do it for free. There will be an interest imposed on the funds you borrow as well as other fees.

Don’t overlook external factors

There could be administrative changes, significant crypto wallet movements, or even crypto exchange hacks, that could potentially cause unforeseen price variations.

Always monitor your positions

Never handle crypto margin trading like a passive investment. You should constantly monitor your positions because unforeseen circumstances can arise at any time which may cause you significant losses. You should always be ready to respond if the trade does not go according to plan.

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Conclusion

Crypto margin trading can leave you with exponential profits or devastating losses. It is a high-risk-reward trading strategy. Inexperienced traders are better off staying away from margin trading with crypto assets. Knowledge about hedging and risk management could come in handy in the case of crypto margin trading.

Here we have taken a look at the basics of crypto margin trading, some terminologies, the pros and cons of crypto margin trading, and some tips to keep in mind while margin trading crypto assets. Keep these things in mind while deciding about crypto margin trading.