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What is Margin Trading?

What is Margin Trading?

Margin trading is a loan of capital to invest, in order to amplify profits swiftly. In conventional investments such as forex, commodities and assets, the loan is provided by third-party, known as brokers.

However, cryptocurrencies are different as loans are issued by other investors. The investors who provide loans will get interests based on the market demand for margin trading. Most cryptocurrency exchanges offer margin trading, such as Binance, but it rarely happens.

Before you involve in margin trading, be sure that you totally understand the concept. Even though margin trading can offer a faster and larger profit, you’re also at risk to experience a huge loss, depending on your loans. Make sure you are well-versed to predict market trends and understand this investment method.

How to Perform Margin Trading?

If you wish to involve in this kind of investment, you should have a margin trading account. How? It depends on which exchange platform you use. To start margin trading, you need to deposit an amount of cryptocurrency that acts as collateral. As in Binance, the sum of the collateral will determine the ratio or percentage of your loans, called Leverage. However, there are other exchange platforms that let you choose ratio leverage, but it depends on the amount of cryptocurrencies of your collateral.

So, what is Leverage? As mentioned above, leverage is the ratio of your loans. For instance, if you want to invest $100,000 margin trading with leverage ratio 10:1, then you will need to transfer $10,000 into your margin trading account. If the ratio specified at 3:1 to open investment of 3 BTC, then you will have to transfer 1 BTC to the margin trading account as collateral.

Despite that, most exchange platforms or other investment assets and commodities have set their rules and leverage rates. In the stock market, 2:1 is a typical ratio, while in Forex, the standard ratio is 50:1. But, it is different for cryptocurrencies, where the ratio starts from 2:1 to 100:1, and the crypto community tends to use the term ‘x’. For example: (2x, 5x, 10x, and so on).

Margin trading can be used to open long and short positions. A long position is the purchase of investment assets by investors with the expected price of assets will increase. A short position is when investors sell their security or investment loans first, and will buy it again when the asset price is declined.

Warning: Lenders have the right to liquidize your collateral if the market movement goes against your target. Taking into an example, if you open a long position and the market price indicates a significant decrease, you will be notified with a margin call, this means you have to transfer more collateral funds into the margin account. If it fails, the existing funds will be liquidated.

Advantages & Disadvantages of Margin Trading

Albeit the risks involved in margin trading, it offers larger profits. Logically, the more you invest, the greater the opportunity for you to generate high profits. But, be careful with the risk of loss. Next, with margin trading, you will get the opportunity to open several positions with less amount of investment capital. Subsequently, margin trading also helps investors to open large positions quickly without having to transfer large sums of money to their accounts.

Apart from offering a range of advantages for investors, they are also exposed to high risk of loss. Investors are at risk of losses exceeding the initial collateral investment, and, despite the price of the asset showing a slight decrease, the potential losses of investors are enormous.

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Margin Trading in Cryptocurrencies

Trading on margin is fundamentally riskier than regular trading, but concerning to cryptocurrencies, it is riskiest and causes huge losses. This is due to the nature of crypto price, which is extremely volatile, thus, the margin traders should be more careful and truly expert about this kind of investment.

Note: Make sure you understand the technical analysis, good at analyzing charts and trends, and most importantly, be certain that you have the right risk management strategy.

Other than margin trading, some other exchange platforms also offer margin funding that has the same features and leverage methods. Simply saying, margin trading is where investors can give their money to fund the margin trades of other investors.  The process follows specific terms and generates dynamic interest rates.

Thoughts

Margin trading is undeniably a beneficial investment method for you to double the profit. However, the same investment also puts you at high risk of loss as well. Hence, you should always be cautious before taking part in this investment.

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