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What is crypto margin trading? A short introduction

Updated: Nov 16, 2021

“What is crypto margin trading? A short introduction:”A guest post provided by Sudhir Khatwani, Chief Editor at TheMoneyMongers (TMM) and a bank professional turned blockchain & cryptocurrency proponent.

Recently, the USA’s largest crypto exchange Coinbase announced margin trading features that provide 3x leverage to individual investors hailing from 23 US states, institutional traders in 44 US states and nine other countries. What’s more, Binance, Huobi, and OKEX– the world’s top three crypto exchanges by volume– already support margin trading. These developments clearly demonstrate that margin trading is becoming a commonplace feature among mainstream crypto exchanges.


What is margin trading?

Crypto investors use different types of trading methods to deal with crypto. One of these methods is margin trading. Here, assets are traded using third party funds. This allows traders to deal in bigger amounts and stand a better chance to earn higher profits.

With larger sums at their disposal, traders can amplify the results to gain profits through successful trades. This benefit makes margin trading one of the most popular trading methods, especially for those traders who are dealing in Forex and other similar non-volatile markets.


The risks of volatility

The opportunity to earn more money from margin trading is balanced by the increased risks of taking a loss. Despite this, traders dealing in highly uncertain markets like stock, cryptocurrency and commodity markets also use this option.

Most experts agree that only traders with tried and tested strategies should attempt margin trading. Newcomers and amateurs are recommended to use dollar-cost averaging (DCA) and other comparatively low-risk strategies.


Traditional vs. crypto margin trading

In traditional markets, the borrowed funds or the margin funds are typically lent by investment brokers. On the other hand, in the crypto market, such funds can be received or borrowed from fellow traders. This is called peer-to-peer lending. Peer-to-peer lenders earn interest based on the amount lent and demand in the market for margin funds determines the interest rate. Most crypto exchanges that offer margin trading follow the peer-to-peer model.


Margin vs. leverage: what’s the difference?

In the crypto industry there are people who use these words interchangeably. However, there is a difference between the two terms. Margin refers to the initial amount of money that’s required to secure the loan, while leverage refers to the increased trading capacity that the loan gives traders.


How does margin trading work?

Let’s consider a simple example. Mr. A wishes to place a $100,000 trade order. The exchange he uses allows for 10:1 margin trading. This means that Mr. A will have to commit $10,000 to the total order value.

There is no standard margin or leverage rate. Different trading platforms have different sets of rules and rates. However, typical leverage rates in the crypto market range from 2:1 to 100:1. The crypto community often states these rates in ‘x’ terminologies, such as 2x, 50x, etc.


Long trades vs. short trades

As far as the trading positions, margin trading can be both long and short trade positions. The long trade position indicates that the trader is expecting the price of the asset to go up. Likewise, the short trade position means that the trader expects the prices of the asset to go down.


What is a margin call?

Many investment brokers (crypto exchanges or the traders who have lent the funds) tend to reserve the right to force the asset’s sale in case the market moves against the expectations of the borrower.

For example, if a trader opens a long position, and the price of the assets drops down below the specified threshold, the traders get a margin-call.

A margin call is when a trader has to put more funds into his/her margin account to fulfill the minimum margin trading criteria. If the trader fails to do so, his/her holdings or assets will be liquidated automatically to compensate for the incurred losses.


Crypto margin trading: pros and cons


Advantages

  1. Traders can expect larger profits.

  2. Helps in investment diversification.

  3. Opening multiple positions becomes possible.

Disadvantages

  1. Exposer to larger losses.

  2. These losses can be more than the traders’ capacity or investment.

  3. A high-risk trading option.

  4. If the trader lacks risk management skills, losses can hit harder.

Where can I trade cryptocurrencies on margin?

Most of the margin-trading sites in the crypto market do not allow US citizens to open margin accounts. U.S. The Securities and Exchange Commission has made it mandatory for every site that serves US citizens to follow certain sets of rules, which margin-trading crypto sites find hard to comply with.

Some years ago, a several international crypto exchanges were available to US citizens, but when the FBI froze 1Broker’s domain in 2018 many of these exchanges started banning them. To get around this, many US citizens have resorted to using VPNs to get access to cryptocurrency margin trading.

Some of the most popular margin trading crypto exchanges include:

  1. Prime XBT

  2. Bitmex

  3. Poloniex

  4. Kraken

The role of crypto margin trading

  1. Helps keep money moving through the market, thus improving market liquidity.

  2. Motivates buyers and sellers to trade more freely and make larger investments.

  3. Improved credibility. More advanced trading features draws in institutional and professional traders.

According to MarketsandMakets, the cryptocurrency market can potentially grow to as much as $1.40 billion by 2024. Many cryptocurrency exchanges are adding margin trading to their list of features to stay competitive.

ByBit offers up to 100X leverage, allowing complex orders for traders who wish to make big out of their investments. CEX.io is one of just a few exchanges that provides both crypto margin trading and fiat deposits.


Bottom line

Margin trading is recommended for experienced traders only. In volatile crypto markets where prices are always fluctuating, margin traders must be careful to set appropriate stop loss limits to avoid major losses. Crypto exchanges’ rates and policies also come into play. Different crypto exchanges have different rates of leverages, and these numbers affect traders’ potential profit amount.


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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.


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