Cryptocurrency Margin Trading: Basics, Cost, Risks, Tips & more
For traders with a limited number of crypto currencies, e.g. bitcoins, altcoins or others, there is the possibility of margin trading to multiply the gains/losses of the investment. This actually increases the amount invested without actually having to increase the assets. It is important to note that margin trading is not recommended for everyone and there is a very high risk.
Let’s get started: What is Margin Trading?
Margin trading using crypto currencies lets users to borrow money against their current funds which can then be used to further trade cryptos on various exchanges but “on margin”. In layman terms, crypto currency holders can leverage their existing cryptos to increase buying power in return of interest. Although interest is not always charged.
This type of trading enables a trader to provide a position with a profit/loss multiplier. For example, you opened a margin position with multiplier X2, your real estate had increased by 10%. Your position increased by 20% due to the X2 multiplier. Standard trades are traded without multipliers.
Margin trading is possible due to the existence of the credit market. Borrowers offer loans to traders so they can invest in multiple coins and lenders benefit from the interest rates of the loans. In some exchanges, such as Poloniex, users offer loans for the markets and in others, the exchange offers the loan itself. For example, in Poloniex, anyone can borrow their bitcoins or altcoins and benefit from the interest on the loans. The main disadvantage is that the coins must be in the exchange wallet, which is much less secure than a cold-wallet.
Costs and risks of Cryptocurrency margin trading
As mentioned above, the cost of the margin position includes the payment of interest on the borrowed coins (whether to the exchange wallet or to other crypto users) and fees for opening a position on the Exchange.
As the chance of winning more is higher, the risk of losing more is also higher. The maximum you can lose is the amount you have invested to open the position. This stage is called the liquidation value. The liquidation value is the value at which the stock exchange would automatically close your position, so that you lose none of the borrowed funds and only lose your own money.
Example: When we talk about standard trading, multiplier X1, the liquidation value is reached when the position reaches zero. As the multiplier increases, the liquidation value will come closer to the purchase price. For example, the bitcoin value is $1000 and you buy a bitcoin with multiplier X2. The cost of your position is $1000 and you borrowed $1000 more, the liquidation value of your position will be a little over $500, because at this point you will lose exactly the initial $1000 plus interest and fees.
Margin trading Tips
Risk management – In margin trading, it is important that there are clear rules regarding risk management. Beware of excessive greed. Consider the amount you are willing to risk to keep an eye on, because it can happen that everything gets lost. Define clear steps for closing positions and take profit or stop the loss.
Watch out – Cryptographic currencies are considered to be assets with excessive fluctuations. Margin trading with crypto currencies doubles the risk. Therefore, try to make short-term deals. In addition, the fees and interest can amount to a considerable sum in the long run.
Extreme movements – Crypto trading sometimes has extreme fluctuations that occur in both directions. The risk in this case is that the depth will affect your liquidation value. It could happen that when the multiplier is high that the liquidation value is relatively close. In fact, you can take advantage of these lows by setting target positions where they believe that the lows will not reach them, so you end up with a decent profit and then go back to the previous price.
Stock exchanges that enable margin trading
It is now possible to conduct margin trading on most stock exchanges. The advantages of trading with multipliers are very clear and another important advantage is the security aspect. Cryptographic traders should try to minimize the amount of coins they have in the Exchange Wallet. The exchange is seen as a hot target for hackers and in recent years there have been several attacks on such exchange wallets, the last big hack was the Bitfinix hack in 2016, when a third of the bitcoins on exchanges were stolen.
Learn more about features of bitcoin
Margin trading allows you to open higher positions without the need for bitcoins, so you need to have fewer coins on the exchange. For example, portfolio could be made up of five bitcoins and you want to hedge against the risk of a decline in bitcoins, then you could open a position with an X10 multiplier and then this would be equivalent to 40% of your bitcoin portfolio. To open the position, the required quantity is only one tenth of that. This means, you only need to keep 0.2 Bitcoins.
Bitcoin and Altcoins Margin Trading for beginners
Bitmex – Bitmex has gained a good reputation in a short period of time and many dealers use it frequently. Leading in margin trading, the stock market offers up to margin trading with a multiplier of up to X100’s. It is very easy to use and offers a lot of support.
Plus500 – Plus500 is a world-renowned forex trading company. In the area of margin trading with cryptocurrencies, it offers Bitcoin and all other large old coins (such as Ethereum, Ripple, Litecoin, Bitcoin Cash and more) for margin trading. The main advantage is that it is a fully regulated company, with 24-7 support for its millions of customers. Currently, you can’t deposit any bitcoins, but you can join and start margin trading immediately with credit card deposit or bank transfer. The multiplier can be set up to X20 and it is easy to get started, as a free demo account can be opened.
Interesting read – history of bitcoin origin
Bitfinex – This exchange coordinates the largest trading volume of the American Bitcoin market with margin trading with a multiplier of up to X3.3, the interface is user-friendly and easy to execute transactions.
Poloniex – The largest crypto exchange. Trading of 11 Altcoins, unfortunately there is no BTC USD margin trading. Only one multiplier of up to X2.5 is available. Relatively high interest rates for short positions.
AVAtrade – Another world-renowned CFD exchange that allows you to trade in Bitcoin CFD and some other major crypto currencies. The company is fully regulated and like Plus500 there is a free demo account.
Hi, I am Nikesh Mehta owner and writer of this site.
I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.