What is Crypto Margin Lending?

Genson C. Glier
Jun 12, 2018 · 8 min read

For crypto traders who have limited resources, such as Altcoins and Bitcoins, there’s always the option of margin trading to add leverage on the investment. This can, in fact, help to increase the amount invested without the need to hold the assets. It’s worth noting that margin trading may not be applicable to everyone and it comes with a high risk.

What is Margin Trading?

Margin trading gives the trader the option to open a position that comes with leverage. For instance, we have opened a margin position that has 2x leverage. Then our base assets increased to 10%. As a result, our position yielded 20% due to the 2x leverage. The usual trades are traded in leverage of 1:1.

Thanks to the existence of a lending market, margin trading is highly possible. A lot of lenders are willing to offer loans to traders, so they can invest more in coins and exchange, lenders can benefit from the interest of the loans. In other exchange, such as Poloniex, users offer the loans for the margin markets and for others the exchange itself will provide them. For instance, with the Poloniex exchange, everyone can choose to lend his or her altcoins or Bitcoins and end up benefiting from the interest earned out of the loan. The biggest disadvantage is that the coins must be in the wallet of the exchange, which is less secure, unlike a cold wallet.

What’s Crypto Lending?

The crypto lending is a much newer way of gaining profits and works around the concept of shorting. You don’t need to understand the concept behind shorting, but you have to understand that with this type of lending, you are lending your funds out to other traders doing short traders. The great thing about crypto lending is that you will not have to worry about the borrower running off with your money. This is because the exchange will hold the funds and will not let the borrower cash it out if they don’t pay their loans. Just like with crypto trading, there are also plenty of lending bots available that give investors the option to automate the process of lending and allow the lending process to go into autopilot.

So what are the disadvantages of crypto lending?

Perhaps the biggest disadvantage is that you’ll be at high risk of losing all your funds if the exchange closes down or if they run away with your funds. This has already happened before, and there’s a possibility that it could happen again. There’s a higher level of risk involved if you’ll choose to invest heavily in only one exchange.

Costs and Risks of Margin Trading

As stated above, the margin position’s cost involves paying the interested of the borrowed coins, whether paying the exchange or other users. It also requires paying the fees to open a position in the exchange. Remember that as the possibility to earn more money increases, the risk to lose more will also increase. The maximum that you can lose is the complete amount that you’ve invested in opening a position for the exchange. Such level is known as liquidation value, and the value is where the exchange will immediately close your position so you will only lose your own money and not the complete loaded amount.

For example, if we talk of the standard trading and leveraging at 1:1, the value of liquidation is only when the position will reach zero. When the leverage increases, the value of liquidation will get closer to the buying price. For instance, the value of Bitcoin is at $1,000, and we have bought one Bitcoin leveraging at 2:1. The overall cost of our position will be USD 1,000 and borrowed USD 1,000 more also. The liquidation value of the position will only be a little more than USD 500, since, at that level, we have initially lost our USD 1,000, along with the interest and fees. The margin trading can also go against the market, and we may be able to also a short position with the leverage.

Below are some of the few things that users have to think about when it comes to margin trading:

  • Maintaining a level of equity

The platform for trading will always require for traders to maintain a minimum level of equity, which is normally set at 30%. If your balance goes below this, you will be asked to deposit more funds into your account to immediately increase the equity. If if you can’t deposit money or you just don’t want to deposit, the brokerage will be forced to close your position to increase the account’s equity.

  • Interests could exceed the profits

It can be profitable to trade on margin, especially when used for short-term investments. If you invest the money and the jump in value that you anticipated did not happen, consider cutting your losses and pay the short-term interest rates. Allowing your margin trading position to remain open for a long period could lead to losses even though the price of your stocks will increase. The reason is that margin trading includes high-interest rates, and in some instances, the profits may not be enough to cover the loan you have obtained.

  • You could lose more than you have

Margin trading does not only magnify the profits. It also magnifies the losses. If things go wrong, you will not only lose your investment, but you could also find yourself in trouble since you’ll have to repay the funds you have borrowed from the broker plus the interests. Iif you’re not careful enough, you could end up accumulating debt. You also need to consider that margin accounts are usually more sensitive compared to the standard trading accounts, thanks to the daily market fluctuation. This also adds a dose of unpredictability to margin trading.

Margin Trading Tips

  • Risk Management

When it comes to margin trading, it’s important to set clear rules regarding risk management, and you have to be aware of excess greed. Carefully consider the amount you’re willing to risk and keep in mind that this could be lost completely.

  • Watch Closely

Crypto coins are the type of assets that are highly volatile. Margin trading of the cryptocurrencies comes with double risk. Therefore, consider making short-term trading in leveraged positions. Furthermore, although the margin position and daily fees are negligible, the fees could eventually increase to a significant amount in the long run.

  • Extreme Movements

Sometimes, crypto trading experiences extreme fluctuations occurring in both directions. The risk when it comes to this is that the deep could touch our liquidation value. This usually happens if the leverage is fairly high and the liquidation value is fairly close. You can take advantage of these deeps, and you can try to set a closing target position and hope that the deep could run over them and will leave you with a decent amount of profit and eventually go back to the original price.

Should You Go for Margin Trading?

We would strongly suggest avoiding margin trading except if you’ve done enough research or that you’re highly experienced. Losing money when trading cryptocurrency is already frustrating enough without having to borrow funds to create leverage positions. This can somehow magnify the level of stress.

Certainly, if you’re less traditional than us and would like to margin trade still, your next thing is to read all the documentation about margin trading in a specific exchange. You should learn about opening and closing margin positions and make sure that you know about calls and margin ratios, and you should at least try to brush up on a few details about margin trading strategies.

Exchanges that Enable Margin Trading

It’s now possible to trade margin in most exchanges. The biggest benefit of leveraged trading is clear, although another important aspect of this is security. Crypto traders must try to minimize the number of coins that they will decide to hold on the exchange. This is because exchanges are often hot targets for hackers and recently, there have been several hacking incidences on exchanges.

Margin trading gives us an option to increase position without the need to provide the required Bitcoin. That way, we would be able to hold fewer coins within the exchange account. For instance, if the portfolio consists of five Bitcoins and we wanted to hedge against the risk involved in the decline of Bitcoins, the 10X leveraged short position can be open and will be equivalent to 40% of our portfolio. To open the position, the amount that’s required will only be a tenth of it or ten times the leverage. This means that we’ll only need to hold about 0.2 Bitcoins and our Bitcoins will be securely stored in cold wallets.

  • Bitmex — Bitmex has gained a good reputation for a while now, and a lot of traders have been using it frequently. Leading the world of margin trading, this exchange provides as much as 100X leverage in margin trading, both short and long. It’s also very straightforward to operate, and they offer good customer support. You could receive 10% discount on trading fees upon registration for the first six months.
  • Plus500 — Plus500 is a fully regulated company that operates worldwide. If you have a Plus500 account, you can trade CFDs on Forex stocks, Options, Indexes, and Commodities. When it comes to crypto margin trading, they have Bitcoins and Altcoins for major trading. The biggest advantage is that they’re a fully regulated company. Furthermore, they have good customer support and have an obligation to millions of customers. It’s also possible to join and start with margin trading immediately through bank transfer and credit card deposit. It’s possible to set-up margin leverage of 1:2 and it usually starts out smooth since the demo account can be opened without any charges.
  • Bitfinex — This type of exchange coordinates with the biggest trading volume of the Bitcoin US dollar market and with margin trading up to leverage of 3.3X. Its interface is user-friendly and simple transactions can be easily carried out in the platform.
  • Poloniex — This is one of the largest crypto exchanges. Having a leveraged trading of 11 Altcoins, they do not have any BTC US dollar margin trading. The leverage is only available at 2.5X, and they often have a fairly high-interest fee during shorting.
  • AVAtrade — This is another CFD exchange that’s world-renowned and enables the trading of the Bitcoins CFD including other major cryptocurrencies. It’s fully regulated and just like with the Plus500, it offers a free demo account.

Be Careful with Ratios

Margin trading with cryptocurrencies is perhaps one of the riskiest bets you’ll ever make. Cryptocurrency itself is risky, and margin trading has made it even riskier. You could end up owing a great amount of money very quickly. Unlike regular trading, margin trading could make you lose the complete initial investment you made. Furthermore, the more you leverage, the faster you could lose it. For instance, if you’ll go long in a 4:1 margin and then the position has gone down to about 25% or perhaps a little less since you most likely have to pay some fees, then the margin is going to be called in, and as a result, nothing will be left on you.

Conclusion

Investing in margin trading will only be profitable if the investment you made will allow you to pay-off your loans, plus any interests incurred. If you are thinking of betting in margin trading, you may want to start with taking baby steps and learn from the experience as you go on. Margin trading is not that bad. It can become a valuable tool for investing, for as long as you can cut the risks involved to an absolute minimum.

BlockLoan

BlockLoan is a global platform for crypto loans driven by a next generation data scoring model

Genson C. Glier

Written by

ICO | Blockchain | Cryptocurrency | Growth Marketing | Entrepreneur | Speaker | Growth Hacker | Product Management

BlockLoan

BlockLoan

BlockLoan is a global platform for crypto loans driven by a next generation data scoring model

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