What is cryptocurrency exchange margin trading
Even a newcomer to the trade understands that the more money a trader has in circulation and use, the greater his opportunities and the higher the chances of making larger amounts.
But what to do if there is not enough money, but you want to get more and more. This requires high revs.
To successfully and profitably trade, you need money, and if you don’t have your own money, many exchanges can provide loans against the trader’s assets. But the stock exchange’s money is ready to provide not its own, but other traders or investors who have free funds that they don’t use yet. Of course, other traders give their money for a reason, but at high interest rates. The size of interest is determined by the market and by the lender personally. He sets the interest rate at which he can provide his free available funds for trading by other traders.
Thus, if a trader does not have his own funds, the exchange is ready to lend him the money of other traders who agreed to lend part of their free funds to other traders at interest.
Credit trading is called margin trading. A loan to a trader is given on the security of his own funds. And as soon as the trader’s own funds become insufficient, the exchange informs the trader about this with an offer to replenish his account. If the trader does not do this, all his orders will be automatically closed and cryptocurrencies sold to satisfy the requirements of lenders.
Thus, the software controls that lenders in any case return their money with interest, regardless of how the trade goes with the trader.
Also, a trader, even in case of successful trading, will not be able to withdraw money from the exchange until he settles with creditors.
If a trader trades only with his own money, he can do it at his own discretion and withdraw at any time. If a trader uses margin trading, that is, money of other traders taken on credit, then he must first pay for his loan obligations and only then withdraw money if, of course, they remain after all settlements with creditors.
How to trade with leverage
Different exchanges represent different conditions for leverage, i.e. margin trading. There are exchanges that provide 100x leverage. This means that you can take a loan, which is 100 times more than the funds that are on your deposit.
But such a huge loan is very risky. After all, with the slightest error and minimal fluctuation in rates, you can lose your entire deposit. All the cryptocurrencies you bought and your entire deposit can go to your lenders, because interest also needs to be paid for the loan, and on the exchange they are usually high.
Therefore, most traders prefer to take leverage, which is equal to their deposit or several times higher, i.e. 2x or 3x.
It is also recommended that beginners start with small loans that are equal to the size of your deposit and not higher than it. In this way, you can understand the principle of margin trading and determine how it works.
In trading, as well as in HYIPs, the principle of diversification applies. You can not send all the credit money to one transaction. After all, cryptocurrency can fall and then you lose all borrowed funds.
In order not to lose all the money in the event of a fall in cryptocurrencies, there are special tools on the exchange. You can set “Stop Loss”. This is a special tool that allows you to record losses and sell cryptocurrency in case the rate drops to a certain point. For example, if you set “stop loss” at around 20%, then your cryptocurrency will be automatically sold if its rate drops by 20%.
But if after a fall of 20%, the cryptocurrency begins to grow, then you can no longer make money on growth, since the entire cryptocurrency will be automatically forcibly sold to fix your losses. Therefore, the use of such tools must be treated very carefully. On the one hand, they can fix your losses and save you if the cryptocurrency continues to fall, on the other hand, if the cryptocurrency turns in the opposite direction and starts to grow, you can’t earn anymore.
At the same time, using margin trading and leverage, you can earn and drop rates. This trade is called “short”.
The meaning of this trade is as follows.
A trader uses leverage and, for example, takes on credit Bitcoin, well, or any other cryptocurrency. Taken on credit Bitcoin, the trader immediately sells. Buys USDT. Tether cryptocurrencies (USDT) are often used by traders to save money and “survive” the fall of cryptocurrencies. As soon as Bitcoin drops to a minimum, a trader buys Bitcoin at a minimum price, pays lenders and interest on the loan, and takes the rest.
Thus, using margin trading, you can earn not only on the growth of cryptocurrencies, but also on their fall. Only in the event of a fall, the trader’s actions are different. He first sells the cryptocurrencies on credit at a higher price and buys USDT, and when the cryptocurrencies fall, he buys them again and pays off with the lenders.
Advantages and disadvantages of margin trading
- The ability to trade in large amounts in the absence of own funds
- The ability to use diversification and various trading strategies in the absence of own funds
- The possibility of quick earnings with the rapid growth or fall of cryptocurrencies (the trader simply does not have time to replenish his balance)
- The ability to receive higher income due to a large turnover of funds
- Use of credit funds. Profit from the implementation of the trading strategy should be high in order to cover exchange commissions, as well as payments for using the loan
- In the case of choosing an unsuccessful strategy, the trader can quickly lose all his money, because in any case he still has to pay interest for using credit money
- The higher the loan size, the more risky all operations and the higher the chance to lose all the money the trader even with the slightest error
- Cryptocurrencies are extremely unpredictable and the chance that something will go wrong is very great.
Recommendations for Beginners
- The main rule in HYIPs is not to use credit money. Cryptocurrencies are also very risky and most of the rules of hype are suitable for them.
- Before using credit money, a trader must fully and self-critically evaluate all his opportunities and calculate the risks.
- Also, do not forget that the interest on the loan is much higher on the stock exchange than what banks offer.
- Margin trading can only be used on the security of own funds and those assets that are bought with credit money. Therefore, if you use margin trading, you will not be able to withdraw even your money, as it is a guarantee of securing loan obligations.
- If you decide to try how margin trading works, it is better to take a loan, which in total does not exceed the size of your own funds on the exchange.
- Also, do not forget about diversification and do not invest all the funds received in the purchase of one asset.
- Using margin trading, do not forget about interest on the use of credit. Interest may be higher than your profit and then you lose money.
- When using margin trading, all these factors must be taken into account.