Cryptocurrencies grab the attention of various established investors. Wholly, margin trading is becoming the next big thing in the crypto space. Margin trading is a way to utilize funds provided by a third party to carry out asset transactions. In comparison with regular trading accounts, margin trading accounts enable traders to acquire more funds and support them in using positions.
Trading cryptocurrency is a piece of cake for everyone, but are you surfing for more advanced options? If you are, then margin trading is for you. Engaging in spot transactions with the use of margin trading you can expand your gain and losses from market swings. Thus allowing you to carry out more complicated, active trading strategies.
In this write-up as a trader, you will learn about the basics of margin trading and how to start crypto margin trading as a newbie. Afterward, you will be able to start margin trading on secure platforms.
What Is Crypto Margin Trading?
Crypto margin trading is an advanced trading strategy that enables you to trade with more funds than you possess. As a trader, you can directly borrow money from a broker (crypto exchanges) and trade assets with more funds than you have in your exchange wallet.
The funds that you are allowed to borrow are in the range between 2x and 125x of your investment. Also, the limit differs depending upon which exchange you are using. The amount that you borrow is known as leverage and the higher your leverage the riskier your trade is.
Before starting a trade, you need to put some funds in your margin account on which basis you will be able to borrow leverage. The amount you invest acts as collateral for the trade and if the price of an asset drops below a certain value in the end you can lose your entire investment.
Suppose, you are borrowing 5x leverage for bitcoin, you can enjoy a profit of 25% if the bitcoin price goes 5%. This seems good because if the price of BTC goes up by 10%, your initial investment will be doubled. Though high rewards also mean high risk.
If the price of bitcoin falls by 5% you will end up losing 25%of your original investment and if the price falls by 10%, you will end up losing all your funds. So only those traders should do margin trading who are fully aware of the cryptocurrency markets and are experts at predicting the price.
Which Cryptocurrencies To Select For Margin Trading?
The cryptocurrency market is largely volatile, and it is difficult to predict some of the cryptocurrencies. Margin trading is well-suited for those cryptocurrencies that are more stable and predictable. Even the crypto space has currencies that have made 70%moves on either side in a single day. So wisely choose that crypto that is the most stable and can be easily predicted.
Positions In Margin Trading
There are two types of positions available in margin trading.
- The long position in margin trading
- The short position in market trading
What Is The Meaning Of a Long Position In Margin Trading?
When a trader predicts the price of a certain cryptocurrency to increase in the upcoming future, they can open a long position for that cryptocurrency. For example, if you predicted that Ethereum with a 10x leverage and its price goes up by 10% you will finally make a 100% profit on your investment. Once you have achieved your desired profit, you can close your position.
What Is The Meaning Of a Short Position In Margin Trading?
The short position is the complete opposite of the long position. While you are thinking that the price of the cryptocurrency will go down in the upcoming future, you are betting against the price by selling the cryptocurrency you do not own at a costly price. When its price falls you can buy it again.
For example, if you are short-selling Ethereum with a 20x leverage, you can double your investment if the price of Ethereum falls by 5% and you will lose your entire investment.
Significant Terms Linked With Margin Trading
There are various terms that you will come across while doing margin trading, so you need to know them beforehand. Some of the important terms you need to learn are as follows:
Margin means the complete amount that the trader has to put up for the trade. How much money you can borrow completely depends on the margin you are adding.
Leverage means the assets you are borrowing from the exchange. You can select the leverage low as 2x or high as 120x. The sum leverage you can borrow depends on many factors like trading policy, margin amount, and the cryptocurrency you are trading.
A margin call means when the exchange wants you to your position to let it remain open. Hence, if you fail to complete the requirement, they can close your position just to cover the difference anytime.
Collateral is the total margin amount that you have dedicated to single or more positions. This is to give exchange the guarantee that you will pay your debt in case the trade goes in the opposite direction.
Stop-limit enables you to open a new position if the price of the assets goes up or below a certain value. After filling up a stop-limit order, you can make sure that you are entering the trade at the correct time.
This is almost like stop-limit order as it allows you to close your position after the value of the asset price has hit a certain price. A stop-loss order is to make sure that you are not suffering any more losses than you can afford.
Whenever you open trade your broker calculates the liquidation price keeping in end the margin and leverage. In the case of long positions, if the price of the asset drops to the liquidation price, you will lose all your funds as your position will be liquidated. But for short positions, if the price of the assets goes as high as the liquidation price, the margin being used for that position will be liquidated.
An isolated margin permits you to dedicate a certain amount of funds to one single position. However, this means if you are running trade with an isolated margin, the output of that trade will only affect the funds attached to that position. The other funds in your account will not be affected.
Cross margin provides you the option to utilize the same funds for multiple positions. For example, if you only have $300 and you want to long both Bitcoin and Ethereum. Then you can open the position in the cross and can give over the funds to both positions. But, you must remember that if one of the positions hits the liquidation price, all the positions will be closed, and then your funds will be liquidated.
Which Of The Cryptocurrencies Allows Margin Trading?
There are various cryptocurrencies out there, but not all of them allow margin trading. Some of the available crypto margin trading exchanges that are secure and of high quality are as follows:
- Binance Futures
- Prime XBT
Can You Do Margin Trading Crypto In The USA?
Margin trading is seen as a different financial product than regular crypto trading. That’s why it is prohibited in the United States of America, as it is considered highly risky.
Though margin trading is famous in the crypto space it is not suitable for all kinds of traders. Either, you can double or triple your investments in a few days. On the other hand, you can also end up losing all your funds in no time.
Read more: How to buy bitcoin