Latest In

News

Margin Trading In Crypto Markets - Leverage Trading Cryptocurrency

Unlock the power of margin trading in crypto markets! Maximize your profits and minimize risks with expert tips and strategies.

Author:James Pierce
Reviewer:Gordon Dickerson
Mar 06, 2024
3.3K Shares
115.1K Views
In this article, we will explore the idea of Margin trading in crypto marketsin relation to Bitcoin and other cryptocurrencies, along with how you can participate in cryptocurrency margin trading in a manner that fits your trading goals. In the world of cryptocurrencies, margin trading allows traders to manage a sizable portfolio with a tiny initial investment.

What Is Crypto Margin Trading?

Crypto margin trading explained with the help of a diagram
Crypto margin trading explained with the help of a diagram
Using borrowed money to cover the cost of a deal is known as margin trading. Therefore, the main distinction between margin trading and spot trading is that the former enables a trader to open a position without having to pay the entire amount out of pocket. Leverage, margin, collateral, and liquidation are the four main ideas in margin trading that you should comprehend.
This is the process of financing a trade with borrowed money. For instance, a trader only needs to pay $200 up front to purchase $1,000 worth of Ethereum (ETH) at a leverage factor of 5x, or a multiple of 5. The remaining $800 is borrowed from the exchange or trading platform.
Otherwise, the trader took out a loan to grow their position five times over. Equity is the amount of the account balance that is determined by subtracting the borrowed amount from the current market price. Various exchanges and trading systems have varying maximum leverage limits.

Marginal

The equity level varies in real-time along with the market price of an asset. The trader will receive a margin call if the equity level falls below a certain level (sometimes referred to as the margin requirement, which is determined by the exchange or trading platform). At that point, the only ways to get the equity value back up to the margin requirement level are to sell all or part of their position and/or add more of their own money to the account.

Security And Disposition

Loans are secured by the assets that traders have in their accounts. The exchange or trading platform may sell the account's assets (also known as liquidation) and use the proceeds to pay off the debt if the trader misses a margin call.

Call For Margin B

With 5x leverage, the trader has purchased $1,000 worth of Ethereum by borrowing $800 and using $200 of their own money. The price of ETH then decreases by 10%. There is a margin call when the equity level falls below the margin requirement threshold, assuming that the exchange or trading platform requires 15% of the account value in margin.
To get the equity back up to the margin requirement, the trader will need to come up with an additional $35, which they can accomplish by either selling some ETH or adding more of their own funds. The exchange or trading platform may forcibly sell the ETH in the account to help pay off the debt if they are unable to fulfill the margin call.

How To Start Spot And Margin Trading With Crypto?

On theCrypto.com Exchange, users can trade on the spot and on margin. The Exchange App and the desktop version both offer spot trading.
Users of the this Exchange can borrow virtual assets to trade on the spot market through margin trading. The margin loan can be used by qualified users as leverage (borrowed virtual assets) to open a position larger than their account balance. It is necessary for traders to first move virtual assets into their margin wallet on the Crypto.com Exchange as collateral.
When users take out virtual loans, they can:
  • In virtual assets of the same kind as their collateral (for instance, they might borrow and use Bitcoin as collateral).
  • In a virtual asset that differs from their collateral (for instance, they borrow USDT whereas their collateral is BTC).
For several reasons, margin trading has grown in popularity as an investment tactic. To begin with, it enables traders to open larger positions. For example, traders can now afford to purchase more BTC than they can afford, as opposed to purchasing BTC with restricted capital. Because you take on less risk and are exposed to more of the upside or downside, this is capital efficient.
Its potential for enormous revenues is another factor in its appeal. In the event of success, traders can create larger returns due to their ability to hold larger holdings, all of which they can keep for themselves. Looking back at Jason's previous Bitcoin trade, he will have made $2,500 despite having only utilized $1,000 of his cash due to a 10% increase in price. That represents a 250% ROI!

What Are Margin Calls?

A margin call occurs when an exchange or brokerage asks a trader to post more margin in order to keep a position from being pushed into liquidation. When the value of the margin account falls to the point that the trader would not have enough collateral to cover the broker's required margin amount or maintenance margin, a margin call is made.
A trader is notified by the brokerage or exchange to either sell assets or deposit additional collateral to make up the difference in position value when the margin account falls below the required maintenance margin.Regardless of the situation of the market, if the trader doesn't comply, the exchange may close the position or reduce it to satisfy the requirement.
This could imply that, in the event of a long position, you are compelled to liquidate or reduce holdings at the exact moment the market reaches a bottom.

Difference Between Margin Trading And Buying Stocks & Crypto

Margin trading shown
Margin trading shown
To buy stocks or cryptocurrency, margin traders borrow funds from the brokerage or exchange. Their purchasing power is increased by this kind of trading, but it also puts pressure on them to maintain the required margin or risk receiving a margin call. Traders in this market typically trade faster than cash traders since margin loan expenses can add up quickly.
The best option when using a longer time horizon for your investment strategy is to pay cash for stocks or cryptocurrency. In this manner, you are not able to pay interest or lose more than you invested.

The Pros Of Margin Trading Cryptocurrency

Making the most of your purchasing power
Your buying power can be greatly increased by using margin and leverage. The extent of this boost in buying power is determined by the leverage ratio that your broker offers. You can control $100,000 with a $10,000 margin account and a 10:1 leverage.
Increase the leverage to 100:1, and even with a $10,000 trading account, you can control $1 million. An very potent tool for your trading toolbox is margin trading. Depending on the leverage ratio you are utilizing, the following table indicates how much margin you should set aside.
Making money off of declining costs
Given that leverage is frequently available with CFDs, you can benefit from both increasing and decreasing prices. When you can manage a substantial amount of money in addition to this, you'll be well-equipped to handle both bull and bad markets.
Adding variety to a portfolio
Not to mention, having more purchasing power can help you diversify your cryptocurrency holdings. To mitigate the risk of overexposure, it is advisable to spread your investments over multiple cryptocurrencies and only allocate a portion of the margin up front.

The Cons Of Margin Trading Cryptocurrency

More possible losses
The potential for significant losses is the main drawback of trading on margin. Trading on margin and using leverage can be advantageous or disadvantageous. Furthermore, you have to be ready for (and in control of) probable losses because you can never be positive of what the market will do.
Call the margin
Margin calls are yet another disadvantage of trading on margin. When your free margin is less than zero, you'll get a margin call. The good news is that with effective risk management, you can lessen the possibility that margin calls will occur.
Possessing curiosity
If you intend to keep your position overnight, you will be required to pay interest on the borrowing since margin trading is reliant on a loan from your broker. Thankfully, margin trading interest rates (or financing charges) are frequently incredibly low.

FAQ's About Margin Trading In Crypto Markets

Is Margin Trading In Cryptocurrency Profitable?

Your approach and risk management are key components of cryptocurrency margin trading profitability. There is a chance for bigger rewards, but there are also bigger hazards. To succeed, one must take a well-informed strategy.

How Can I Begin Margin Cryptocurrency Trading?

Open a cryptocurrency trading account and make your first deposit. Choose the cryptocurrency pair, decide on your leverage, place trades, and, if you want to reduce risk, think about putting stop-loss orders in place.

Is Trading On Margin Preferable To Traditional Trading?

Although there is a chance for greater gains with margin trading, there is also a greater chance of losses. Your trading approach and risk tolerance will determine if it's better or not. For seasoned traders, it may yield more rewards, but the hazards are also higher.

Conclusion

Trading cryptocurrency on margin has significant potential for both profit and risk, making it a two-edged sword. The skill of risk management is a prerequisite for success in this hectic environment. It serves as a survival kit in addition to a guide. Recall that every cryptocurrency margin trading success is predicated on a sound strategy, cautious risk management, and an attitude of perpetual learning. Although the cryptocurrency market can be volatile, it can also present opportunities if approached correctly.
See Also: 10 Crypto Market Breakout Signals To Watch In 2024
Jump to
James Pierce

James Pierce

Author
James Pierce, a Finance and Crypto expert, brings over 15 years of experience to his writing. With a Master's degree in Finance from Harvard University, James's insightful articles and research papers have earned him recognition in the industry. His expertise spans financial markets and digital currencies, making him a trusted source for analysis and commentary. James seamlessly integrates his passion for travel into his work, providing readers with a unique perspective on global finance and the digital economy. Outside of writing, James enjoys photography, hiking, and exploring local cuisines during his travels.
Gordon Dickerson

Gordon Dickerson

Reviewer
Gordon Dickerson, a visionary in Crypto, NFT, and Web3, brings over 10 years of expertise in blockchain technology. With a Bachelor's in Computer Science from MIT and a Master's from Stanford, Gordon's strategic leadership has been instrumental in shaping global blockchain adoption. His commitment to inclusivity fosters a diverse ecosystem. In his spare time, Gordon enjoys gourmet cooking, cycling, stargazing as an amateur astronomer, and exploring non-fiction literature. His blend of expertise, credibility, and genuine passion for innovation makes him a trusted authority in decentralized technologies, driving impactful change with a personal touch.
Latest Articles
Popular Articles