What is Margin Trading? | Bitcoin Example
Currently, in the world of cryptocurrency, margin trading is the hot topic trending across various social communities. Yet, it is a relatively new concept in crypto-asset markets, which means that many may still be wondering ‘what is margin trading’ and ‘why is it so desirable to traders?’
Margin trading allows traders to access and trade a greater amount of capital than their trading account would otherwise allow. This is made possible by leveraging funds provided by their trading platform. The profits a trader yields from a leveraged trade are relative to the increased position size, while losses are limited to their initial investment.
Margin trading allows traders to profit in both rising and falling markets with the possibility to ‘long’ (buy) in upwards price actions, and ‘short’ (sell) in downwards price actions. Profits are calculated by the difference in the entry and exit price, supposing you bet in the right direction.
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What Does ‘Margin’ & ‘Leverage’ Mean Exactly?
Margin: is the minimum amount of capital required by a trader to open a leveraged position and is used as collateral if the trade is unsuccessful.
Leverage: refers to how much the margin is multiplied by in order to open the increased position size.
Bitcoin Margin Trading Example
Let’s say ‘James’ deposits $1,000 into his margin account as collateral, he uses 100x leverage to enter a $100,000 long position ($1,000 x 100 = $100,000).
As James expected, Bitcoin’s price goes up by 5% from $10,500 USD to $11,025.
Therefore, Jame’s $100,000 leveraged position yields him a $5,000 ROI, instead of only $50 if no leverage was utilized (5% of $100,000 = $5,000).
It’s important to note, that while the ROI is significantly increased, likewise is the risk of loss, as the market’s movement is relative to the margin — which leaves little room for error if the price moves opposingly.
Fortunately, the strategy doesn’t require a trader to hold and risk a large amount of their own capital.
Crypto Margin Trading Exchanges
Until recently, the number of crypto margin trading exchanges was somewhat limited, with BitMEX as the only major provider since 2014. However, in early 2019, the game dramatically changed when PrimeXBT launched and disrupted the industry by offering up to 100x leverage to the widest range of the top-performing crypto-assets.
Building upon this momentum, margin trading on Binance is now a reality; the renowned crypto exchange recently added a leverage allowance of 3x on selected assets. While 3x leverage is modest comparatively, Binance’s adaption demonstrates the increasing demand for the lucrative trading strategy.
Due to the fact that margin trading is extremely popular and common practice in traditional financial markets, the influx of traditional investors now entering cryptocurrency markets has undoubtedly added to this growing trend.
Consequently, PrimeXBT has naturally become the fastest-growing Bitcoin trading platform in 2019, by offering access to 30+ traditional financial instruments in the world’s most popular forex, commodities, and stock indices markets — in addition to the major cryptos, all on the one platform.
In case you are still left unsure of exactly ‘what is margin trading?’, you can dive deeper into the mechanics, i.e. how to open leveraged positions, place orders, and implement risk management strategies, with these video tutorials.
Best of luck and happy trading!
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