Alternative trading mechanisms: crypto margin and derivatives trading
Whether you’re a crypto holder looking for higher returns or a trader interested in diversifying your portfolio, the crypto markets of today offer a wider range of financial instruments than in the past. Building on the fundamental elements of traditional finance, two products that have gained popularity recently in the crypto space are margin and derivatives trading.
What is crypto margin trading?
Trading on margin is the practice of borrowing funds to trade digital assets beyond an available account balance. Margin trading lets traders increase their buying or selling power so they can make bigger trades and potentially achieve higher returns.
For example, a trader with only $25 USDT but who is extremely bullish on Bitcoin could deposit their Tether and leverage 4:1 to borrow $75, allowing them to buy $100 worth of Bitcoin. But, the trader is still on the hook for the remaining $75 plus any associated fees.
AscendEX is somewhat unique because the platform supports cross-asset collateral posting. So, traders can use any one of the ~ 50 assets for margin trading as collateral and then borrow against to go long or short other assets. This means a trader could have used $50 USDT notional of their ETH balance in March of this year to buy $500 worth of BTC (at that time leverage was 10:1). With a spot price on March 15 of $5,397, this would net the trader approximately 0.09 BTC. By May 15, that 0.09 BTC was worth ~$881 USDT notional, enough to cover the outstanding $450 loan and generate over $500 in profit for the trader.
To help traders further maximize their returns, AscendEX offers 0% interest on margin loans that are repaid inside the 8-hour funding intervals.
What are crypto futures?
Crypto futures contracts are agreements between counterparties to buy or sell a digital asset for an agreed-upon price at a specified date in the future. This is in contrast with a spot trade, which is settled immediately.
If a spot trader buys 1 BTC on a BTC/USDT order book, the trader is purchasing that BTC from willing sellers at the prevailing market price (the spot price). After the trade is consummated and settled, the buyer’s trading account will be credited 1 BTC, and the seller’s trading account will be debited an offsetting amount of USDT.
Trading a futures contract, however, does not involve the immediate settlement of the underlying asset. Instead, the contract dictates that the underlying asset will be settled at a future date, referred to as the “Expiration.” Depending on market sentiment at any given moment, futures contracts may trade at a significant premium or discount to the spot price of the underlying assets.
Bitcoin perpetual contracts
One method to invest in crypto futures that gained popularity this year is the perpetual contract, like the Bitcoin perpetual contract available on AscendEX (with leverage of up to 100x). Unlike traditional futures contracts, perpetual contracts do not have an expiration date: traders can hold long or short positions “in perpetuity” provided that they maintain sufficient collateral.
Perpetual contracts grant traders the opportunity to speculate and take a view on the future price of an asset, paying out periodically along the way. If contract prices are trading at a discount to the underlying spot market, funding rates will be negative and short positions will pay long positions. Or, if contract prices are trading at a premium to the market, funding rates will be positive and long positions will pay short positions.
Understanding the risks of crypto trading with leverage
Overall leveraged trading can be a double-edged sword — the potential for greater rewards comes with increased risk. Trading with leverage through margin trading or the AscendEX Bitcoin Perpetual Contract is popular because it can boost buying power and therefore potential returns. But, utilizing leverage will also amplify the trading loss if the price moves against the trader’s positions.
Traders should be strategic in opening high margin trades, if at all, in order to reduce the risk of liquidation or even greater financial loss. Margin trading introduces the risk of losing more than a trader’s initial capital investment. Depending on the amount of leverage used for a trade, even small drops in spot price can result in significant losses. For example, at 100x leverage, a 1% move in a contract price can either double a trader’s account value or drain the account completely. Traders who engage in margin trading should be familiar with risk management strategies and tools like stop-limit orders.
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If you’re interested in getting started with alternative crypto trading mechanisms, check out this video on margin trading basics from the AscendEX team or fund your Margin Account today.
