What is margin trading
For traders with a limited number of crypto resources, such as Bitcoin and altcoins, the opportunity of margin trading using leverage is provided.
This, in essence, increases the amount of investment without requiring actual ownership of assets. It is important to note that margin trading is not recommended for everyone and is associated with a very high risk.
Margin trading allows a trader to open positions using leverage.
For example, we opened a position with a leverage of 2x. Our underlying assets increased by 10%. Our position has grown by 20% due to 2X leverage. Standard trades are traded with a leverage of 1: 1.
Margin trading is possible due to the existence of a lending market.Lenders provide loans to traders so that they can invest in large amounts of coins, and lenders profit from interest on loans.
On some exchanges, such as Poloniex, loans for margin markets are provided by users, and in other cases, the exchange itself provides them.
For example, on the Poloniex exchange, anyone can lend their bitcoins or altcoins, receiving interest on the loan.
The main drawback is that the coins must be in the wallet of the exchange, which is much less secure than a cold wallet.
Costs and risks of margin trading
As mentioned above, the cost of a margin position includes interest paid on borrowed coins (to the exchange or other users), as well as the commission for opening a position on the exchange.
Although the chance of making more money increases, the risk of losing more also increases. The maximum that you can lose is the amount you invested to open a position.
This level is called the cost of liquidation. Salvage value is the price at which the exchange automatically closes your position, so you do not lose borrowed money and risk only your own capital.
Example: if we are talking about standard trading with a leverage of 1: 1, liquidation value is achieved when the position reaches zero.
As leverage increases, the residual value will approach your purchase price.
For example, the price of bitcoin is $ 1000, and we bought one bitcoin (took a long position) with a leverage of 2: 1.
The cost of our position is 1000 USD, and in addition we took another 1000 USD.
The liquidation value of our position will be slightly above 500 USD – because at this level we lose our initial 1000 USD plus interest and commissions.
Margin trading can also be conducted against the market – with leverage you can open short positions.
Margin Trading Tips
Risk management – in margin trading, it is important that strict risk management rules are followed and beware of excessive greed.
Calculate the amount that you are willing to risk taking into account the fact that it can be completely lost. Set clear levels to close positions, take profits and stop loss.
Be careful – cryptocurrencies are considered assets with excessive volatility. With margin trading in cryptocurrencies, the risk doubles.
Therefore, try to open with leverage only short-term trading transactions.
In addition, although the daily fees for margin positions are insignificant, in the long run they can result in a very significant amount.
Extreme movements – for cryptocurrency trading, extreme fluctuations sometimes occur in both directions.
The risk in this case lies in the fact that such a fluctuation can easily reach liquidation value.
This can happen when the leverage is relatively large, and therefore the level of residual value is relatively close.
In fact, you can take advantage of these fluctuations and try to set profit targets so that price fluctuations reach them, leaving you a decent profit, and then return to the previous level.
Exchanges that provide margin trading opportunities
At the moment, you can trade using leverage on most exchanges.
- Bitmex – this exchange has gained an excellent reputation in a short time, and many traders often use it (including our team). The exchange offers margin trading with leverage up to 100X for both long and short transactions. It is very easy to operate and has good support.
- Binance – since 2019, margin trading is available on one of the best cryptocurrency exchanges. Exchange capitalization and trading volume speak for themselves.
- Bitfinex – the largest trading volume for Bitcoin / USD is concentrated on this exchange, margin trading with a leverage of up to 3.3X is available. The interface is very user friendly and transactions are very easy.
- Poloniex is the largest cryptocurrency exchange. Leverage trading for 11 altcoins; there is no margin trading on the BTC / USD pair. Only 2.5X leverage is available. Relatively high interest rates for short sales.
- AVAtrade is another world-famous CFD exchange that allows you to trade CFDs on Bitcoin, as well as some other major cryptocurrencies. The company fully complies with all standards, and, like Plus500, it has a free demo account. A video tutorial is available to get you started with AVAtrade.
The advantages of leverage trading are quite obvious, and the security aspect is another important advantage.
Cryptocurrency traders should strive to minimize the number of coins they hold on exchanges.
Exchanges are considered popular targets for hackers, and in recent years there have been several hacks of large trading floors, the last of which was the Bitfinex hack in 2016, when a third of bitcoins was stolen from the exchange.
Margin trading allows you to open large positions with fewer bitcoins, so you can keep fewer coins on the exchange account.
For example, if your portfolio consists of five bitcoins, and you want to insure yourself against the risk of a cryptocurrency fall, you can open a short position with a leverage of 10X, and this will be equivalent to 40% of your portfolio.
To open a position requires only a tenth of it (leverage is tenfold). This means that we need to keep only 0.2 bitcoin.
Thus, the remaining bitcoins will be safely stored in a cold wallet.
Plus500 – Plus500 is a fully regulated international company.
A trader with a Plus500 account can trade Forex CFDs, as well as stocks, commodities, options and indices.
In the field of cryptocurrency margin trading, they offer Bitcoin and all the main altcoins (for example, Ethereum, Ripple, Litecoin, Bitcoin Cash and much more).
The main advantage is that the company complies with all laws (Plus500 UK Ltd is authorized by the Financial Regulatory and Supervisory Authority FRN 509909), has a round-the-clock support service and obligations to millions of its customers.
You can join and immediately start margin trading, replenishing your account with a credit card or bank transfer.
Leverage can be set at a maximum of 1:30, and a smooth start to trading provides a free demo account. Click here to start trading.
Warning. About 80.6% of retail investors lose money invested in CFDs with this provider. You should consider whether you can afford to risk your money.