Cryptocurrency Margin Trading
Margin trading has become quite popular among cryptocurrency traders these days as it enables getting higher profits. Herewith, this trading option is connected with increased risks. Let’s have a look at the main features of margin trading in terms of cryptocurrency market.
What is Margin Trading
Margin trading is a type of trading with the use of borrowed funds when a trader uses a loan to buy assets and effect trading. Such loans are usually given by exchanges, though some exchanges allow borrowing directly from other users. Margin trading allows opening a position with leverage for trading and speculating on trades with an amount that exceeds the assets in hold.
This type of trading is wide spread on traditional stock market. Up to date some cryptocurrency exchanges also offer this option for certain digital currencies. The most popular cryptocurrency to be bought on margin is Bitcoin though some altcoins, such as Ethereum, Litecoin, Dash, etc., are also available on margin depending on the exchange. There is no big difference between margin trading of traditional assets and cryptocurrency.
There are both long and short positions available for margin trading. A long position is a bet that the asset will rise in value with the aim to use leverage to benefit from increased gains if the price rise prediction comes true. A short position is a bet that the asset will fall in value. It means selling cryptocurrency to bet that its price will go down with the goal is to purchase the crypto back once its price has dropped and profit from the spread.
The maximum available leverage is typically expressed as a ratio that differs between exchanges. For example, 5:1 or 5x leverage ratio means that you can use 5 times more borrowed funds than you have. All margin positions are subject to forced liquidation by the exchange. The maximum amount of assets the trader can lose is the amount he invested in ordering the position. It is called the liquidation value and used by exchanges as an indicator to close the position automatically in order not to run the risk of losing any of the loaned money.
Example
Conditions:
Trader’s own funds: 1 BTC
Leverage ratio: 2x
Opened position: 1000 USD (long)
Positive scenario:
In case Bitcoin price increases by 10% up to 1100 USD, the position yields 20% to the 2x leverage. So, if the trader closes position at this price, he gets 200 USD reduced by the trading fees. The same way, 3x leverage would bring him 3x profit, and so on.
Negative scenario:
In case Bitcoin price decreases to the level when the trader loses his initial 1000 USD, the position will be liquidated by the exchange. In our example the liquidation value will be a little over 500 USD as interest rate and fees are also taken into account.
Pros and Cons
On the one hand, margin trading allows investors to buy more assets than they could with their own capital and consequently make more profit in case of successful trading. On the other hand, this type of trading is connected with higher risks as the liquidation value is increased and investors can lose all they have plus interest rate. Therefore, margin trading is recommended only for experienced traders who have necessary skills to safely use it to their advantage.
Exchanges can significantly benefit from margin trading in two ways. One way of making profit with the use of margin trading is increased commission received as a result of higher trading volume. Another way to benefit is interest charged for margin lending. Meanwhile, the risk of margin trading for exchanges is reduced as all margin positions are subject to forced liquidation by the exchange to make sure that the trader won’t default on his borrowed funds.
Exchanges offering margin trading
Many cryptocurrency exchanges provide their users with an opportunity of margin trading. The process of opening a margin position on different exchanges is more or less the same, though fees, the maximum leverage ratio and assets available for margin trading can differ significantly. Moreover, some exchanges offer margin trading only for customers who meet a range of requirements, such as ID verification, specified amount of funds, etc. Some examples of the exchanges currently offering margin trading are given below.
✔ BitMEX: up to 100x leverage
✔ Huobi: up to 5x leverage
✔ Bitfinex: up to 3,3x leverage
✔ CEX.io: up to 3x leverage
✔ Poloniex: up to 2,5x leverage
Appearance of margin trading in the crypto market represents the progress cryptocurrency is making towards mainstream acceptance providing more trading opportunities for investors all around the world.
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