Margin Trading on Centralized vs. Decentralized Exchanges

Published in

Nuo Network

7 min readSep 25, 2019

Margin trading or leverage trading enables crypto traders to multiply their gains if done correctly. However, the associated risks are also higher in the margin trading as there is a good chance of liquidation of your funds as well which is why it is always advised to follow the golden rule of trading, “invest only what you can afford to lose”.

So, before getting into how margin trading differs on Decentralised exchanges when compared to centralized ones, let’s go through what margin trading is at its core!

What is Margin Trading?

Simply put, margin trading refers to a trading technique that allows an investor to trade assets with funds provided by a third party (usually an entity). Thus, you can leverage their funds to trade assets and make some bucks yourself. This type of trading is mostly adopted by investors (both retail or institutional) who are low on funds but are interested in increasing their financial powers through assets trading.

Essentially, the funds from the third party enable the investor to trade with a bigger sum of money than the individual personally has. Of course, in most cases, your investment power determines your profit. Thus, getting financial assistance from such third parties also boosts your chances of earning more from your investment.

Note, however, that before you have access to the fund, you are required to offer a certain percentage of the loan value. The initial offer you invest is referred to as the margin. Thus, it is a win-win for both the investor and the lender because while the lender gets a deposit investment, the borrower can realize larger profits on each transaction that goes smoothly.

In Crypto space, the margin to the borrowed funds is expressed in terms of ratios. This ranges between 2:1 and 100:1, depending on the platform(usually an exchange). This can also be expressed as 2x, 5x, 10x, and so on, where X represents the margin and the prefix stands for the borrowed amount.

For instance, if the margin is 5x, that implies that the exchange will offer you 5 times your margin amount. Thus, someone who puts a margin of $5,000 will get a loan of $25,000 for asset trading.

The traditional trading ecosystem is based on complete centralization but in the crypto landscape, there are two different types of platforms available for margin trading, i.e, centralized and decentralized exchanges.

Margin Trading on Centralized Exchange

A centralized cryptocurrency exchange resembles traditional bank, stock market, or brokerage firm in many ways. Almost all the transactions and functionalities are completely controlled by one single central entity on the centralized exchanges. Thus, users of centralized exchanges are not the only ones with access to their account wallets’ private keys, giving the company in charge an absolute control over the transactions conducted on their platform.

You simply can’t make transactions without the involvement of the company in charge since your operations are limited to the mechanisms they provide. Such mechanisms are usually subjected to the approval of a central authority.

While centralized Cryptocurrency exchange has done a good job of making digital currencies readily available to investors and general users, their achievement is overshadowed by their shortcomings.

Some of the weaknesses of centralized exchanges that are undermining their growth are:

Security Challenges

Centralized exchanges are prone to severe security challenges. Over the years, hundreds of millions worth of digital currencies has been lost to cyberattacks, costing investors their hard-earned money.

If you are in doubt, don’t forget the unfortunate event that signaled the end of Mt. Gox. Although it was once recognized as the best Cryptocurrency exchange in the world, it has now become another part of ancient history.

Consider the following headlines from major newspapers across the globe:

2. Privacy Issues

Operating on centralized crypto exchanges exposes you to privacy issues too. Your privacy is not guaranteed when you take such a decision. For a start, a centralized exchange needs your card details, bank account number, and other personal data for operations. In case of a security breach, the losses are not just restricted to the assets but also to the sensitive user information. The consequences in such cases are beyond imagination.

The centralization also removes potential challenges in transaction tracking. Thus, your data can easily be traced back to you, increasing your vulnerability to attacks while breaching your privacy.

3. Hidden Costs

While Cryptocurrency transactions are supposedly based on trust and credibility, that’s not the case with centralized exchanges. Besides the normal transaction fee, they make traders on their platform pay some hidden charges that are usually not a part of the initial agreement until when it is difficult to back out of the transaction.

This is unarguably one of the biggest cases against these centralized cryptocurrency exchange. It is responsible for the quest for exchanges where transparency is the watchword.

This excerpt from an article entitled Hidden Bitcoin Transaction Fees — The Real Cost to Trade Bitcoin gives a comprehensive idea of what digital currency investors go through in the hands of manipulative exchanges that are interested in getting as much as they can from their customers through malicious hidden fees: “The thing about cryptocurrencies is not all the Bitcoin networks are in alignment.

Between some exchanges, there is a significant price difference and sometimes during busy hours, the difference between exchanges can be even greater, particularly across different regional areas.”

The hidden charges come in different forms. They include:

Long/short funding: This is common to BitMEX. It charges this fee between shorts and longs three times within 24 hours. The platform’s users pay this fee for perpetual contracts. The type of funding depends on the market’s expectations.
Margin fees: Kraken is the expert at charging margin fees. The exchange charges two types of the fee. These are a margin rollover fee and a margin opening fee. The exchange charges this fee in the borrowed currency.
Rollover fee: This hidden fee is common to Kraken. The exchange charges this fee on each position it keeps open four times within 24 hours. For instance, except on Tether (USDT) and Bitcoin (BTC) that attract 0.01% rollover fee, other contracts attract 0.02% rollover fee.
Trade and overnight fee: These fees are charged by PrimeXBT. The latter are same as the margin fee charged by other exchanges except for BitMEX while the trading fee is a percentage collected for performing transactions on the exchange.

While some of these charges are seemingly insignificant, especially when making small transactions, they amount to something when digital currencies that are worth huge sums of money are involved. Make a mental calculation of the conversion fee if you deposit £1 million. Well, let me spare you the stress. That’s some tens of thousands of dollars.

Centralized Cryptocurrency exchanges’ flaws highlighted in this article are the major factors that necessitated the need for decentralized exchanges. Let’s see what the latter has to offer.

Start Margin Trading with Nuo

Margin Trading on Decentralized Exchanges

This simple definition by Wikipedia nails it. The online encyclopedia defines a decentralized exchange as a “cryptocurrency exchange which operates in a decentralized way, i.e., without a central authority. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies.”

In a nutshell, a decentralized cryptocurrency exchange is a direct opposite of what a centralized exchange represents. It offers cryptocurrency exchange services without taking users through the challenges that are synonymous to centralized exchanges.

Some of its outstanding qualities are:

Better Security

One of the biggest advantages of a decentralized exchange is improved security over the centralized opponent. As a user, you are not obliged to put all your trust and confidence in the exchange. This is because you have your funds in your wallet and not held by a third party. Thus, you can implement more security strategies that will fortify your investment against hacking and other security challenges.

Maximum Privacy

Privacy is another important element of decentralized exchanges. These exchanges don’t request your personal details. Your details are only required during transactions with another user that involves bank transfers. Mind you, you are not revealing your identity to the exchange but the other party involved in the transaction.

No Hidden Charges

If you are put off by the hidden charges that characterize centralized exchanges, check the decentralized option out. Margin trading on decentralized exchanges such as NUO Network attract zero hidden charges and are more convenient as well.

Hence, rest assured that aside from the margin trading fee which is predetermined before you take the loan, you won’t pay a dime for using the platform. This makes it possible for a potential borrower to have an idea of their charges before taking the loan.

To Sum it up

It is noteworthy that while centralized exchanges obviously set the pace in the Cryptocurrency exchange industry, their excessive charges, along with other downsides, has drastically limited their acceptance among Cryptocurrency enthusiasts.

On the other hand, decentralized exchanges are giving investors the lifeline they need to succeed in the Cryptocurrency industry by offering them the best services and affordable charges. The choice is yours.