Cryptocurrency trading attracts more people every day. Against the backdrop of a pandemic, unemployment is developing. Cryptocurrency margin trading allows users to get super profit fast. As with any other trading, there are risks that we will discuss below.
Let’s find out what cryptocurrency margin trading is, how to reduce risks, and which platform to choose.
What Is Crypto Margin Trading
Margin trading is an operation with assets when funds provided by a third party are used. Margin trading platforms provide traders with access to more funds, which allows them to use this in their positions. Although this feature is in little demand, some cryptocurrency exchanges provide loan funds to their users.
This type of trading is also called leverage trading. This name is associated with leverage – a multiplier (1–100x), which increases the user deposit available for the transaction at the expense of borrowed funds.
Bob decides to invest $200, plus borrow $800 to buy $1,000 in Bitcoins. In this case, the leverage is 4:1, and the initial margin is $200, which is money that you need to deposit to buy cryptocurrency.
A trader can open positions with leverage as purchasing opportunities increase. Lenders receive interest on loans issued.
The situation seems to be a win-win, but something can always go wrong. Bob will have to return the borrowed $800, plus interest. Due to the high volatility of cryptocurrencies, the scheme looks risky. It is difficult to predict market movement, so here one risk overlaps with another.
Margin Trading Risks
Margin trading has an obvious drawback. Losses can increase as well as profits. Unlike the classic type of transactions, margin trading is very likely to incur losses that exceed the initial investment of the trader. Depending on the amount of leverage of the transaction, even a small drop in the market price can lead to significant losses for traders.
The right risk management strategy must guide investors who choose to use margin trading. A tool such as a stop-limit order can reduce risk.
If Bob deposits $1000 on the exchange and opens a long Bitcoin position with a leverage of 10x (1:10), the amount of the open position will be $ 0,000 (the amount available to the trader has increased tenfold). If the price increases by 1%, Bobs’s profit will be calculated from the total transaction amount, i.e., it will be $100.
In total, when a position is closed at this moment, the trader’s balance will be $1,100 (subtract the fee and other payments defined by exchange’s rules). If there were no leverage, the profit would be only $10.
An important point in margin trading is that a liquidation price is set for any transaction. This is a price mark calculated by the exchange, upon reaching which the position will be automatically closed with complete removal from the user’s balance of the margin that ensures it.
That is, if, in the example described above, a long deal was opened at a bitcoin price of $10,000 and the liquidation price was set at $9,500, a drop in the rate to this mark would lead to a loss of $1,000 contributed by the trader.
A margin call is the state of a liquid portfolio when its value falls below the minimum margin.
Exchanges monitor the value of digital assets on a margin account not to fall below a certain level. If prices rise, the position can be kept open for as long as there is no risk of losing one’s own and borrowed funds.
If the price falls, the exchange will prevent loss by liquidating the position. A trader can prevent this by selling a certain amount of assets or by investing additional funds in a margin account.
Stop-loss is a type of order that serves to limit trading risks and automatically closes positions as soon as the price reaches the desired level. Stop loss is considered one of the main tools for effective trading.
From a technical point of view, this is simply a pending order that automatically activates at a given rate value. The difference is as follows: in regular pending order, the deal is not closed but replaced with a new one. Stop-loss also allows you to get rid of the constant monitoring of the position.
We’ve collected 9 rules for the margin trading beginner.
Learn the theory of cryptocurrency margin trading. Read the FAQ section on exchanges offering tools for trading with leverage.
Choose a platform for trading based on its reputation, reviews, list of supported cryptocurrencies, types of orders and trading instruments, available options for margin multiplier, minimum deposit, etc.
Learn the rules of service by the selected exchange, paying particular attention to the sections on commission fees, debt payments, terms of liquidation of transactions and other financial issues.
Buy bitcoin or any other cryptocurrency that will be used for margin trading, and transfer it to the balance of your account on the chosen exchange.
For trial transactions, allocate a small deposit (up to 5%) to protect yourself from bankruptcy.
Choose small leverage, 2x or 3x. The liquidation level will be relatively far from the entry price, which means that the risk of loss of funds is not so great.
Use stop-loss from the calculation of fixing no more than a 20-30% loss.
Trade only cryptocurrencies with which charts you are familiar.
Avoid opening deals during periods of excessive volatility and market uncertainty.
5 Best Exchanges for Margin Trading
Margin trading is a useful tool for those who want to increase profits from their successful transactions. When used properly with such leverage, it can contribute to profitability. Now let’s look at several platforms on which you can try yourself in margin trading.
Binance provides the opportunity to trade with leverage only for verified users. You can trade several cryptocurrencies in several options for trading pairs, e.g. Bitcoin (BTC), XRP, Binance Coin (BNB), TRON (TRX), and Ethereum (ETH). Binance provides a separate margin account.
Huobi Pro is a cryptocurrency exchange that has been operating since 2013. When registering for it, you will need to enter an email address and confirm your identity (sometimes the process takes a couple of days).
At the moment, you can margin trade 42 different trading pairs. You can short it or go long. For Bitcoin, the maximum leverage is x5. The daily loan rate is 0.1% for USDT. When you take out a loan of other currencies, the rate is 0.02%. Read more about margin trading on Huobi in its guide.
The Bitfinex exchange provides a leverage of 3.3x. If there is $10, then you can trade at $33. The trading process is standard. It has additional information on account balances, margin and collateral are visible on the screen. In the balance section, you can transfer funds between margin and regular accounts.
When opening a position, the user can apply for financing himself, choose the amount he needs, the loan period, as well as the interest rate.
Poloniex Exchange is one of the pioneers in the cryptosphere, operating since 2014. After registration, you must pass an identity confirmation to use the site. It is recommended that you always protect access to your funds with two-factor authentication.
You can use leverage up to 2.5x on Poloniex, applying it to the following cryptocurrencies: Bitcoin, Ethereum, Stellar, Monero, Ripple, Litecoin, Dogecoin, and more.
OKEX crypto exchange was opened in 2014 in Hong Kong. Supports work with cryptocurrency, cryptocurrencies, fiat, futures. It also provides the ability to trade with leverage.
According to the standard scheme, the user can borrow money, undertaking to repay it on time. Recently, the exchange has increased leverage. Previously, it was 3x, now 5x, which opens up more opportunities for investment.
Unlike standard trading, where any unexpected movement of the rate can most often be simply waited, here a long-term drawdown will mean a loss of deposit. You should start margin trading only when you can seriously approach risk control and the formation of a trading strategy.
Be mentally prepared for potential losses in advance. Only with this approach will it be possible to derive stable benefits from trading with cryptocurrencies with leverage.
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Changelly provides an ecosystem of products and services that enables customers to have a one-stop-shop experience when engaging with crypto. Operating since 2015, Changelly acts as an intermediary between crypto exchanges and users, offering access to 160+ cryptocurrencies that can be effortlessly swapped within 10 minutes on desktop and on-the-go via Changelly mobile app.
In 2020, Changelly has branched out to accommodate the needs of traders. PRO has been built to provide a fully compliant, regulated, and easy to use platform focused around the needs of the customer, effectively enabling retail buying and selling of digital tokens and coins. Piggy-backing the great support system found within Changelly, Changelly PRO will provide the community with high limits, effective pricing, fast execution, and 24/7 live support.