What is margin trading in cryptocurrency
Margin trading is all trades performed by a trader using borrowed funds. The main motive for using this tool in trading is profit maximization. But it’s a double-edged sword: the risks increase proportionately.
To see how it works, here’s an example:
You have $2,000 in your account.. You want to buy five Etherium Coins, each worth $1 700. That’s a total of $8 500. Your own funds for the operation will not be enough, but if you borrow from the exchange, you can make a deal. If the price of ether goes up 25% to $2 125 you will earn $2 125 and more than double your initial account. If the transaction had been made solely with my own money, the profit would have been only $500.
True, if the ether dropped by 23.5%, that would be the end of the trade. The exchange would forcefully close your position, as no one would allow you to lose borrowed money.
You can trade both long and short;
Trading shorts and longs on margin
Short is a credit in itself and therefore a variant of margin trading. Only in this case, you borrow not dollars or other currency, and directly to the crypto-assets that you are going to sell. It would look like this.
Current bitcoin price $26,500. You believe that BTC will fall, so it must be sold. Since you do not have BTC in hand, you borrow from the exchange. Then the price goes down to $26,000 and you get your $500 profit.
When you go long, on the contrary, you believe that the value of the cryptocurrency will rise, as in the ether example above.
So far, we’ve only touched on the topic of potential profits. What about the risks? How big are they when trading cryptocurrency on margin?
Risks of cryptocurrency margin trading
The maximum you can lose is your entire investment. Margin trading involves trading with leverage, with the amount you take the cryptocurrency far exceeds your own funds. And if a coin suddenly moves in your direction, the trade can quickly come to an end.. You need to pay special attention to this, because cryptocurrencies are a highly volatile asset.
Margin trading is a highly speculative activity. Investors don’t do that.. Here you have to be constantly involved in the process. This is especially true for altcoins. For example, you took a $100,000 Avalanche with $10,000 in your account.. Ten minutes later, news came out from the developers that the platform had stopped confirming transactions due to a hacker attack. AVAX token price collapsed by more than 12%. Your trade will be forcibly terminated at a loss of 10%. No exchange is going to let you lose her money.
In this regard, if you are not going to sit at the monitor all the time, then at least use stop orders. This would at least limit the potential losses.
Sites for margin trading
Cryptocurrency is traded on cryptocurrency exchanges. Accordingly, there you will be able to use margin trading. For 2023, all of the most popular exchanges allow leveraged trading: no one wants to give in to the competition.
It’s worth noting that each exchange will regulate margin trading differently. For example,
on Binance; first you have to pass a test. Only if you answer all the questions correctly will a margin trading account become available. After activation it is necessary to transfer money to the margin wallet, and then you can make transactions using borrowed funds.
The U.S. exchange Kraken also
offers margin trading. The maximum leverage available there is the fifth one, which means that you can take cryptocurrencies for the amount five times your own account.
In this case everything will depend on your level of verification. Totally
There are four levels: Starter, Express, Intermediate, and Pro. Only the latter two can use margin trading, but again, not all. There are geographical restrictions. For each specific country, the information should be checked at the
Check the official website.
In general, however, all sites will also vary by:
- the number of cryptocurrencies offered for margin trading;
- the amount of fees;
- the amount of credit
- leverage amount;
- liquidity
- liquidity;
- variety of available derivative financial instruments.
.
Bottom line: margin trading in cryptocurrency is both an option of quick earnings, and an option of instantly letting it all go. It is available on almost any exchange. Margin trading suits experienced speculators, but will not interest investors and is dangerous for beginners.
This material and the information it contains do not constitute personal or other investment advice. The editorial opinion does not necessarily reflect the views of the author, analytical portals and experts;