If you are an aspiring crypto investor, there are many ways to trade cryptocurrency. You may heard of short trading, crypto trading with leverage, or margin trading. These three terms mean the same thing; leveraging crypto trading.
Crypto margin trading doesn’t have to be complex to understand. Generally, margin trading has become a popular trading technique across many financial markets, and in recent times, it has found its way into the cryptocurrency market. Margin trading is regarded as one that guarantees high rewards, but just like any other type of trading, it can be risky!
We all know that the crypto market is a highly volatile one, with coin prices fluctuation with high margins in short time spans. These price fluctuations experienced by cryptocurrency markets simply mean that investors and traders can make considerable gains during both the bull and bear markets through margin trading. But what does margin trading cryptocurrencies mean? Peruse the article and get to know more about margin trading in cryptocurrencies.
So, what is margin trading in cryptocurrencies?
In simple terms, margin trading is a type of trading that involves using funds provided by a third party. And on most occasions, this third party is your trading platform. As you may have guessed, margin trading allows you as a trader to have access to more capital, allowing you to leverage your trading position. It allows you to achieve higher potential profits by adding more risks to your trading position. You can borrow the funds from a third party, in this case, can be your trading platform, other trading platforms, referred to as margin lenders.
Simply put, margin trading is a trading tactic that enables traders to have greater exposure to a particular crypto coin by borrowing capital from lenders on the exchange or the exchange itself. As opposed to conventional crypto trading where you use your own funds to cater for transactions, margin trading allows traders and investors to boost the amount of capital they can trade.
As earlier mentioned, margin trading is also commonly referred to as leverage trading. Leverage refers to the amount by which an investor can boost their trading position. For instance, a leveraged trader who opens a trade with 10-times leverage will boost his/her exposure as well as potential profit by ten times.
Though margin trading can be highly profitable, there are drawbacks to margin trading cryptocurrency. Margin crypto trading may be a great tool to amplify your trading position, but it also gives you a higher risk. While not always substantial, risks in crypto margin trading can sometimes exceed the committed assets in some instances.
So, how does margin trading in cryptocurrency works?
Margin trading in crypto is fairly simple and straightforward. Generally, a trader offers the exchange platform a little bit of capital in return for a larger capital to trade with, and trades with the offered capital for an opportunity to earn a huge profit.
It is imperative to note that for you take part in crypto margin trading, you first need to open a position, known as initial margin. What’s more, you must have a specific amount of capital in your account to preserve the position. This amount is known as the maintenance margin. Various crypto exchanges offer different leverage amounts. Whereas some may offer 100-times leverage, others opt to limit their leverage to 30, 50, or even 200-times.
When you initiate a margin trade with a particular cryptocurrency exchange, the amount of capital you deposited to open the trade is usually held as collateral by your exchange. And the amount you can leverage as a result of margin trading mainly depends on the regulations imposed by that particular exchange as well as your initial trading margin.
So, what are long and short positions in cryptocurrency margin trading?
You have probably heard about open and long trading positions in cryptocurrency. But do you really know and understand what these terms mean? In crypto trading, long positions simply refer to a scenario where an investor anticipates that the value of a particular crypto coin will go up in the near future. On the other hand, if you go short, you are simply anticipating that the price of a certain crypto coin will go down. Those who go short are typically seeking to profit from failing crypto coins.
When conducting margin trading in crypto, the exchange you are trading on holds your initial deposits as collateral. And if you successfully close your position at a profit, your exchange will release all your deposits together with the earned profits. On the other hand, if you incur a loss when margin trading, your trading exchange will subsequently liquidate your position and eventually close your trade.
So, what liquidation and margin calls in crypto?
When you borrow capital from a particular exchange to trade cryptocurrency, the exchange puts in place numerous regulations to help keep its risk to the minimum. And this means that if you open a trading position but the goes against your prediction, the chances are that the exchange will require more collateral from you to help secure your position.
When this happens, the exchange will inevitably impose the so-called margin call on you! Margin calls occur when the price of a crypto coin in a margin trade decreases below a specific point. The exchange that provided the capital for margin trade will request more funds from the investor so that the exchange can lower its risk. While most crypto exchanges will always inform you about this through email, as a margin trader, you should routinely monitor your margin levels.
It is imperative to note that if the margin level of your crypto trading position becomes excessively insecure, it is highly likely that your exchange will close your position, a practice described as liquidation. Liquidation will only take place when a crypto exchange automatically shuts a position to ensure that the only money lost is the capital initially deposited by the investor who opened that position.
So, is cryptocurrency margin trading a good idea?
Crypto margin trading truly offers a number of perks. One major benefit of margin crypto trading is that it can potentially lead to huge profits because of the high volatility of the crypto market. What’s more, crypto margin trading can be a great strategy for diversification because it allows traders to open many trading positions with fairly smaller amounts of investment capital.
It can also be argued that margin trading in crypto also allows investors to easily open trading positions without having to transfer large amounts of funds to their accounts. You can simply borrow those funds from your exchange and trade accordingly.
So, what are the risks involved in crypto margin trading?
Despite its vast potential benefits, margin crypto trading is a highly risky endeavor. There are lots of risks synonymous with the crypto trading industry that any aspiring margin crypto trader should incorporate into their risk reduction strategy.
First and foremost, you should be aware of the fact that the crypto industry is largely unregulated. As a result, it is very common for it to experience both long and short in short time spans, for example. As opposed to conventional financial markets, the cryptocurrency industry experiences extreme short-term fluctuations that traders should always take into account while margin trading any digital asset.
It is also worth noting that higher margins come with equally higher risks. Some exchange platforms provide margins at relatively higher ratios, and this will only magnify your exposure to risks if things go against you. This is simply because of how a trading position can be highly prone to liquidation, even if there are only fairly small movements in a particular crypto coin’s value.
Margin trading, remember, should only be considered a short-term strategy because of how fast the crypto markets can fluctuate. Traders should only allocate a small proportion of your overall portfolio for margin trading. Most importantly, you must always ensure that you are trading with a reputable and credible platform that boasts sound security measures and great infrastructure.
In case you didn’t know, there are numerous questionable crypto exchanges out there that are not reputable and trustworthy, and trading with them can easily result in the loss of your hard-earned money! So, before you even consider taking part in margin trading, you should do your homework and thoroughly research the exchange you are looking to trade on.
So, how can you mitigate your risks while margin trading cryptocurrency?
There is no foolproof way to curb the risks associated with margin trading! However, just like any other type of cryptocurrency trading, there are a few things that you can do to help somehow reduce the magnitude of any risks, should they occur. First and foremost, make sure you have some basic background in margin trading before you invest in margin trading.
As always, invest wisely if you happen to. While no investment move is ever certain, some are usually more fulfilling compared to others. Of course, if you strongly believe that you are doing the right thing, based on your research and level of experience, go for it!
Also, as earlier explained, don’t go all out on margin trading, especially in crypto. While having a chance to earn huge profits can be a motivator to invest big in crypto margin trading, there is never a guarantee that you’ll rip big results. So, at the start of your journey in margin trading, always invest small amounts just to have considerable leverage to help you gain confidence as learn the basics of the trade.
The Bottom Line
Margin trading in crypto is a fairly complex business that requires traders to have some experience and knowledge to stand a chance of making any profits. Because it involves borrowing capital from a third party, traders have easy access to extra investment capital. However, this also implies that this borrowed capital must be returned regardless of whether a trader realizes a loss or profit! This is what makes it risky.