Margin trading allows traders to access greater sums of capital by leveraging their positions. In essence, leverage expands the ability of traders to operate with a higher sum of money, in turn increasing volatility. This method is most common in international Forex markets, but is also popular in stock, commodity and cryptocurrency markets. The extra borrowed funds required are provided by investment brokerage, other traders or crypto exchanges earning interest for their services.
How does margin trading work?
Margin traders can open positions, both long positions and short positions. When a trader initiates a margin trade, a certain amount of their funds get locked. For example a trader wants to buy two Bitcoins, to opens a $60,000 trade at a 10:1 leverage, the trader will commit $6,000 of their capital. The ranges of leverage vary depending on the trading platform and market conditions. The usual range is between 2:1 to 100:1 (2x ,100x). It’s important to note that margin trading creates a scenario where money can be easily made or lost. A margin call occurs when a leveraged trade falls below the minimum margin trading requirement and the trader fails to deposit more funds. In this case, when the liquidation price is reached their holdings are automatically liquidated to cover the trading losses.
Where can you trade crypto on margins?
There are many margin trading exchanges that allow traders to manage their margin positions with anywhere from 5x to 125x:
These cryptocurrency exchanges offering thausend of trading pairs of crypto assets could be a good option for beginners as well as professionals in the field of crypto, blockchain and DeFi, as well as offer competitive trading fees.
Advantages and Disadvantages
The most prevailing advantage of margin trading is the ability to create greater value with smaller investments, inceasing your buying power. Without leverage trading for, say, the Forex market, profits will be slow and smaller players would be disincentivized. Furthermore, margin trading accounts allows greater portfolio diversification, as traders can open several positions with a relatively small amount of investment capital. This also increases flexibility because traders don’t have to shift large sums of money between their accounts.
When it comes to leveraged positions, it’s important to remember the golden rule- “High Risk, High Reward”. Choosing an overly high leverage could lead to large price swings where a small drop in market price may cause significant losses. Not to mention the mental and emotional stress that often accompanies a high leveraged trade. This is why traders who utilize margin trading crypto should familiarize themselves with risk-management strategies as well as risk-mitigation tools, such as stop-limit orders. You can read more about these strategies in our market order types blog post.
Margin trading in the crypto market
Cryptocurrencies have proved to be more volatile and strongly associated with higher risk-reward ratio compared to traditional markets. The inherently high levels of volatility in crypto should keep investors alert, as large price movements to the highs or lows of any given cryptocurrency margin trading range can happen rather fast. Understanding concepts and accumulated knowledge of chart analysis, trend identification and following daily news updates will help you with entering successful trades, but won’t eliminate risks involved.
If used properly, margin trading can aid in both portfolio profitability and diversification. However, traders should approach market volatility with caution. Before leveraging your cryptocurrency trades, we highly advise you to check out our technical analysis blog post for some more insights.