Guide to Margin Trading Crypto

Cryptocurrency trading is risky, but leverage trading them is even more dangerous.

That’s why you should think twice before getting into crypto trading and think thrice before indulging in the margin or leverage trading of cryptocurrencies.

Many of you might get lured into crypto trading because of the stories you hear from your friends and how they turned $1000 to $10,000 in a matter of weeks !!

But on the flip side, they forget to tell you how much risk they have taken to achieve these kinds of returns and what they are its downsides…

That’s why in this guide, let’s try to understand leverage trading in cryptocurrencies, its risks, and how, if it is used correctly, it could serve you to achieve your investment goals.

1. What is Margin Trading Cryptocurrency?

Margin trading in crypto involves borrowing funds from an exchange and using it to make a trade. Margin trading is also referred to as trading with leverage because it involves traders “leveraging up” their trades beyond the existing capital they have to work with.

Here’s an example: imagine that a trader opens a long position on Bitcoin for $100 and the price rises by 10%. The trader would make $10 in profit (excluding any fees).

If that same trader were to make the same trade using 5x leverage, their profit would be $50 (10 x 5 = 50).

Some investors who use margin trading in crypto use 10x, 50x, or even 100x leverage. This can amplify potential gains, but it also comes with much greater risk.

2. How Does Margin Trading Crypto Work?

Margin trading crypto involves borrowing money in order to make larger or more trades. But an important factor to keep in mind is what’s called the liquidation price. When the market reaches the liquidation price, the exchange will automically close a position. This is done so that traders only lose their own money and not the funds that were lent out to them.

When one is trading with only their own funds, the liquidation price for a long position on an asset is zero. But with increasing leverage, the liquidation price climbs closer to the price at which a trader buys.

Investors can use margin lending to establish either long or short positions (yes, it’s possible to short Bitcoin), allowing for the potential to profit no matter which way the market moves.

For example, say the price of one Bitcoin (BTC) is $10,000. A trader wants to do some Bitcoin margin trading and establishes a long position by buying one Bitcoin with 2x leverage. That means they would have spent $10,000 and borrowed an additional $10,000 for a position worth $20,000 before fees and interest.

In this case, the liquidation price would be slightly over $5,000. Once this level has been reached, the trader would lose their entire investment plus interest and fees.

Here’s why: buying $10,000 worth of BTC would normally require the price to drop to zero for a trader to lose their entire position. But with 2x leverage, the bet has been doubled. A trader has amplified their potential gains or losses by two times their initial investment. Therefore, if the price drops 50%, they wind up losing 100% of what they invested (50 x 2 = 100).

The exact liquidation price in this example would be a little higher than 50% less than the buy price because part of the cost to open the position includes fees and interest.

Understanding Margin Calls & Liquidation

When you borrow money from an exchange in order to margin trade Bitcoin, the exchange that provides the capital keeps a number of controls in place in order to lower their risk. If you open a trade and the market moves against you, it may happen that the exchange will ask for more collateral in order to secure your position or forcibly close the position.

When this occurs, your exchange is likely to hit you with a so called margin call. A margin call occurs when the value of the asset in a margin trade falls below a certain point. The exchange that funds the margin trade will ask for more funds from the trader in order to lower their risk. Most exchanges will notify traders via email, but it’s important to actively monitor your margin levels.

If the margin level of a position becomes too insecure, an exchange is likely to close the position — this is referred to as the margin liquidation level, or liquidation price. Liquidation occurs when an exchange automatically closes a position in order to ensure the only capital lost is the capital deposited by the trader that opened the position.

Let’s suppose a trader opens a 2:1 long position when the price of Bitcoin is $10,000. The cost of the position is $10,000, but the trader has borrowed an additional $10,000 from the exchange. The liquidation price of the position is therefore $5,000 — at this price level, the trader has lost their initial $10,000 collateral and is thus liquidated by the exchange.

For example, a position with 10x leverage requires only a 10% move to be liquidated (100 / 10 = 10). A 10% move can happen within hours or even minutes in the crypto markets.

Where Can You Trade Crypto on Margin?

There are a number of crypto exchanges that allow traders to trade on margin, including:

•   FTX

•   BitMEX

•   Binance Futures

•   Phemex

•   Huobi Futures

•   Bybit

•   KuCoin Futures

These exchanges offer leverage of anywhere from 10x to 125x. Trading with the use of leverage is risky in any market, and the more leverage used, the higher the risk. Margin trading in crypto markets is even riskier due to the extreme volatility.

What Are the Fees for Crypto Margin Trading?

There are two costs associated with margin trading crypto:

1.    Fees for opening a position

2.    Interest owed for borrowing coins

The interest rate, known as the “funding rate”, is peer-to-peer and depends on a variety of factors like the current premium between the spot and futures price of an asset. This rate is usually re-calculated each hour.

Who Lends To Margin Traders & Why Do They Engage In Margin Trading Of Cryptos?

Margin traders engage in margin trading to maximize their profits with little money/cryptos at their disposal.

On the other hand, most margin traders are veteran traders who understand the market dynamics and back their technical analysis. (I know there are newbies too, more on that later !!)

Of course, this doesn’t mean that they cannot go wrong, and they also do!!

Brokers or people who want to earn an extra percentage of income on their cryptocurrency or Bitcoin holdings usually lend to these margin traders for a flat fee or interest rate.

So whenever the portfolio of a margin trader is performing well, these lenders keep getting the promised fee or interest rate on their lendings.

While on the other hand, if the portfolio performs poorly, then the position is automatically closed, and the remaining funds plus the interest is returned to the lender.

Now, I know some of you might be wondering how that happens automatically and who closes the position to reduce further losses for the lender?

Well, here comes the dedicated margin trading cryptocurrency exchanges which I had listed above.

3. Pros and Cons of Margin Trading Cryptocurrency

As with any investment strategy, there are positives and negatives associated with margin trading in crypto. This chart maps them out.

Pros	Cons
Potential for large profits in a short amount of time	Extremely high-risk — and any uptick in volatility increases risk even more
Allows traders to establish bigger positions with less capital	It’s possible for traders to lose large amounts of money very fast. During bouts of volatility, trades may be liquidated at a loss before traders can react
Can provide a way to make winning trades during small market moves	Requires near-perfect timing of the market
Allows traders to keep less crypto on an exchange	A trader has to exit a position when it’s profitable, as market moves become amplified with leverage. Inexperienced traders are likely to take large losses when trading with leverage.

Risk Management and Cryptocurrency Margin Trading

Trading on margin is very high-risk. The higher the volatility and the more leverage used, the greater the risk, as the chances of a trader being “blown out” of their position (when the liquidation price hits) increases.

This makes margin trading in crypto among the riskiest endeavors an investor could possibly pursue.

In an attempt to manage this risk, many traders hedge their bets by opening opposing positions. This is a common way of dealing with investment risk management.

For example, if someone holds a lot of Bitcoin, this would be considered a long position. One way to hedge against the downward price volatility might be to place a leveraged short position. This way, if the price of Bitcoin falls, the short position will rise in value and the investor may recoup some of their losses.

FAQ

Is crypto margin trading profitable?

When it works, margin trading in crypto can be very profitable. If a long position gets initiated right before a price surge, traders could make many times their initial investment. Of course, with cryptocurrency markets being very volatile, the opposite can just as easily happen. Large losses can be realized in short amounts of time.

Which coin is best for margin trading?

It depends on the individual. Someone looking to get into crypto margin trading with the least risk possible might consider Bitcoin to be the best coin because of its lower volatility when compared to other coins (note: that’s still a lot of volatility). Others might see smaller coins as being the best because they could potentially provide bigger returns on a shorter time frame.

Should I Margin Trade Crypto?

If you understand how margin works, then you should trade crypto on margin.

Otherwise, one should not buy/sell cryptos like Bitcoin on margin. Even if it is possible to do, one should not do it as this trading strategy is not sustainable for & especially for those who don’t understand margin.

How do you find crypto trading exchanges offering margin?

So that’s all from us in this massive guide on some of the best crypto margin trading platforms available today in the market.

But I do have some words of wisdom for novice crypto investors:

If you are not comfortable with the wild volatility of crypto, do not trade bitcoins or any cryptocurrencies, and don’t even think about leverage.

I am saying this not to frighten you but to give a head-ups because I have seen many people losing vast amounts of money in margin trading bitcoins/cryptocurrencies.

Read more: Leverage in Crypto Trading | Notes When Buy Leveraged Tokens

Conclusion

Many might have heard that crypto margin trades are the quickest way to earn a lot of money but let me tell you, it is also the quickest way to lose your money if not done right.

Margin trading in crypto is often utilized by professional traders. The leverage involved can lead to exaggerated market moves known as “long squeezes” or “short squeezes,” where a sudden price movement can trigger liquidations and result in greater volatility. This happens often in the crypto markets, which trade very thinly compared to most traditional markets.

I hope this post will help you. Don't forget to leave a like, comment and sharing it with others. Thank you!

#bitcoin #cryptocurrency #blockchain 

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