Do you want to trade cryptocurrencies but have only a limited amount of capital to invest in? You can try using cryptocurrency margin trading. This tool is used to amplify your buying power so that you can get maximum gains even with a small capital to start with at a very high risk.
Margin trading for cryptocurrencies can seem complicated, but it doesn’t have to be! Today, we’ll talk about all things margin trading – what it is, its history, pros and cons, margin fees, and the best margin trading exchanges you can utilize.
Defining Cryptocurrency Margin Trading
We’ll start by defining what is margin trading for cryptocurrencies.
Cryptocurrency margin trading is a practice where a trader borrows additional capital from a broker or exchange to raise his buying power. This allows the trader to increase his purchase power, potentially raising his gains and getting bigger profits as well at a higher risk.
Here’s a basic example to help you grasp the margin trading concept further:
You’re confident that bitcoin will increase in price and want to leverage your chances of earning bigger profits from bitcoin’s market movement. You decide to trade with bitcoins but only have a limited capital to invest. The most you can trade is at $5,000.
You then came across a margin trading exchange offering to triple your existing capital. You borrowed the additional funds and now have $15,000 to purchase and trade in bitcoins.
Margin trading is not exclusively used in cryptocurrency trading. It’s also used in trading typical fiat stocks. The same principle applies to both, however, crypto margin trading can be riskier due to the volatility of most cryptocurrencies.
There are other mechanisms like futures trading were basically you, as the holder of a futures contract are waging more into long term stability of a cryptoasset, and then trading those short term contracts to generate higher gains. An important difference between margin trading and futures trading is that in margin funding, you pay interest on the amount funded. On futures trading, there is no interest payable by yourself. However, indirectly, you pay interest when you opt-in in a rollover position if you decide to undergo a next futures round (short term contracts in futures trading last around 3 months).
How Does Margin Trading Work?
In essence, you’ll borrow funds from crypto exchanges to create leverage (increased buying power) for opening larger positions. The margin (loan) you take out is collateralized by the funds you already hold in your account. This margin incurs interest that you have to pay back along with the principal amount.
but it can also play out like this:
You’ll see leverage reflected as a ratio. In our previous example, the leverage used was 3:1. This means you opened a position worth three times your original account value.
Margin Trading History
Margin trading history with fiat currencies actually started as early as the 1920s. The practice was modeled by the cryptocurrency world around the mid-2000s.
Brokers and exchanges during that time saw it fit to include a financial tool such as margin trading in their services. This was approximately between 2013-2017, the time when Bitcoin’s values rose and other similar coins entered the cryptocurrency world. Margin trading was well-received by experienced crypto traders around the world.
Margin Trading Pros
Here’s a list of margin trading pros that offer some insights on the benefits of buying cryptos on margin:
- Ability to trade even with limited funds on hand
- Higher profits if market prices move in your favor
- Allows you to build bigger balances
- Suitable for experienced traders knowledgeable with risk management
Margin Trading Cons
Margin trading may sound great, but it does come with high risks. Here are some margin trading cons you need to know, especially when the market moves in a direction opposite that what you predicted:
- Potential for huge losses when the market doesn’t move in your favor
- Required to hold a certain percentage of your position’s value at all times
- Should comply with a margin call or risk closing down your order
- Must pay for interest and trading fees
- Not recommended for crypto trading beginners
Margin Trading Exchanges
There are plenty of margin trading exchanges out there. However, Kraken is the only exchange offering excellent margin trading services to US citizens.
If you’re not from the United States, you can check out the following margin trading exchanges as well:
Most of these exchanges offer leverages of up to 100:1 in ratio. They’re all reliable platforms with ample security features and low to mid-range margin fees.
Margin trading is a lucrative way to enjoy higher trading profits at a small capital. However, with its potential for huge earnings also comes the risk of amplifying losses. This practice is recommended for experienced crypto traders with substantial knowledge of risk management.
If you’re a newbie to crypto trading, seek guidance first and remember the risks associated with margin trading to safeguard your crypto’s value.
If you’d like to know more about ACCOINTING.COM and what it can do for you and your margin trades, try us out at http://www.accointing.com and we will be happy to answer your questions about margin trading or join our Telegram community here.