KuCoin Academy Lesson 11| A Bull Market Is Coming But Your Funds Are Limited. How To Amplify Your Profit?
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In the first week, we said that the most convenient and easiest way to get crypto assets is to directly purchase them through an exchange. In addition to knowing how to buy cryptocurrency using fiat currency, you also need to know how to make transactions between cryptocurrencies if you want to become a senior crypto investor.
In KuCoin Academy lesson 11, we will demonstrate how to amplify your profit?
In the cryptocurrency world, in addition to the spot trading market, there are still other markets, like margin trading and futures trading. These trading markets can amplify your profit, but will also expose you to increasing risks, so use caution.
Contents:
*What is margin trading?
*Advantages and disadvantages of margin trading
*Margin trading example
*What is futures trading?
*Advantages and disadvantages of futures trading
*What are the differences between margin and futures trading?
1. What is margin trading?
Margin trading is a method of using funds provided by a third party to trade assets. For example, KuCoin currently provides up to 10x leverage. When your principal is only 1 BTC, you can borrow up to 9 BTC through KuCoin’s lending platform. It should be noted that leverage is used to amplify your principal on the basis of your existing principal, that is, if you have 1 BTC, it can be increased to 10 by borrowing, but if you have no principal in your account, you cannot borrow any funds.
In margin trading, the money borrowed is usually provided by other traders, so you have to pay interest. When you repay borrowed money, you need to repay the principal and interest.
2. Advantages and disadvantages of margin trading
The most obvious advantage of margin trading is that it allows users to magnify their principal and use small funds as a guarantee to make larger investments, and earn more profits. In addition, margin trading can be traded in both directions. Users can either go long when bullish, or go short when bearish. It’s a more flexible investment method.
However, when users suffer losses, margin trading also brings more losses to users. The higher the leverage is, the greater the losses may be. For this reason, it’s important that investors who decide to utilize margin trading employ proper risk management strategies and make use of risk mitigation tools.
3. Margin trading example
As mentioned earlier, margin trading can be traded long or short, meaning that you can profit whether the price goes up or down. Take Bitcoin, for example:
Go Long: A thinks that Bitcoin will rise from $10,000 to $12,000 in the future, and his account only has 10,000 USDT. If he directly buys Bitcoin and Bitcoin’s price rises to $12,000, he will make a profit of $2,000. If he uses 10x leverage, he can borrow another 90,000 USDT from the KuCoin lending market and make his investable amount reach 100,000 USDT. By buying and selling Bitcoin, he will make a profit of $20,000 through his trading and magnify the yield by 10x.
Go Short: If A thinks that Bitcoin will fall from $10,000 to $8,000 in the future, and his account only has 1 BTC, he can sell it at $10,000 and get 10,000 USDT, and then buy it back when it falls to $8,000. In this way, he will have 1 BTC + 2,000 USDT in his account, thus making a profit of 2,000 USDT compared to doing nothing at the beginning. If he uses 10x leverage, he can borrow another 9 BTC from the KuCoin lending market and sell it to get 100,000 USDT. After the price of Bitcoin falls, he will buy back 10 BTC and repay the 9 BTC that he has borrowed. Now he has 1 BTC + 20,000 USDT in his account, which also magnifies the yield by 10x.
In short, if you think Bitcoin will rise, then borrow USDT and go long Bitcoin; if you think Bitcoin will fall, borrow Bitcoin and short it. The leverage ratio is the multiple by which your profits may be magnified.
4. What is futures trading?
Futures trading is also known as Contract trading. We know that spot trading follows the traditional way of trading, which is cash on delivery, while futures trading is buying and selling the standardized forward contracts. According to this forward contract, the buyer will buy into assets at a predetermined price at a specified time (named delivery date) in the future, and the seller needs to deliver the asset at the predetermined price at the delivery date.
For example, A thinks that Bitcoin may rise from $10,000 to $12,000 in 3 months, so he goes to B and signs a Bitcoin contract. According to the contract, they will not close the transaction immediately, but A can buy 1 Bitcoin from B at a price of $10,000 after 3 months. Three months later, the two parties complete the transaction in accordance with the previously signed contract. Who will earn? This depends on the price of Bitcoin after 3 months. If Bitcoin is already $12,000, then A spent $10,000 to buy 1 Bitcoin and made $2,000; but if the price of Bitcoin falls to $8,000, A still needs to spend $10,000 to buy 1 BTC from B, and so B made $2,000 because he sold the Bitcoin worth $8,000 for $10,000.
Futures trading can be divided into perpetual contracts and delivery contracts according to delivery dates and can also be divided into USDT-margined contracts and BTC-margined contracts according to settlement coins. What are the advantages of each contract? We will explain them later.
5. Advantages and disadvantages of futures trading
There are many similarities between futures trading and margin trading. For example, futures trading also allows users to magnify the principal and earn more profit, and can be traded in both directions (go long or go short), which is a more flexible investment method. But while futures trading amplifies profits, it also increases risks.
6. What are the differences between margin and futures trading?
Although futures and margin have a lot in common, there are several essential differences between the two.
First, their markets are not the same. Margin trading is an extension of spot trading and exists in the spot market. Contract trading needs to build an independent derivatives trading market.
Second, the number of tokens the two support are also different. Margin trading usually supports more tokens, while contract trading often only supports mainstream tokens. Using KuCoin as an example, the current KuCoin margin trading supports 16 tokens, including BTC, ETH, EOS, BCH, and KCS, while futures trading only supports BTC, ETH, BCH and BSV.
Then, the two have different leverages. Currently, margin trading on the vast majority of trading platforms supports 1–10x. For example, KuCoin margin trading supports 10x leverages, while contract trading usually supports even higher leverages of 10x, 20x, 50x, and 100x, which is currently the highest multiple KuCoin supports.
Finally, the trading fees are also different. Margin trading produces loan and trading fees. Loan fees are calculated when the asset is lent, and the interest fee is generally applied on a daily basis. Futures trading fees are generally only charged on trading (or deliveries). Meanwhile, the margin trading fee rate is often the same as the spot, usually around 0.1%, while the contract trading fee rate is usually around 0.02–0.05%.
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