Traders with
a limited amount of crypto resources, i.e., Bitcoin and Altcoins have the option
of margin trading to add leverage to the
investment or position. In face, this increases the amount invested without
having to actually hold the assets. It is important to note that margin trading
is not recommended for everyone and that it has a very high risk.
Let’s
start: What is Margin Trading?
Margin
trading allows a trader to open a position with leverage. For example, if we
opened a margin position with 2X leverage and our base assets had increased by
10%. Our position would have yielded 20% because of the 2X leverage. Standard
trades are traded with a leverage of 1:1.
In most
exchanges, margin trading is possible due to the existence of the lending
market. Lenders provide loans to traders so they can invest in larger amounts
of coins, and lenders benefit from the interest on the loans.
In some
exchanges, like Poloniex, users provide the loans for the margin markets, and
in others the exchange itself provides them. For example, in the Poloniex
exchange, anyone can lend their Bitcoins or Altcoins and benefit from interest
on the loan. The main disadvantage is that the coins need to be in the
exchange’s wallet, which is a lot less secure than a cold wallet.
Bitcoin
& Crypto Margin Exchanges
Costs
and Risks of Margin Trading
As mentioned
above, the cost of the margin position includes paying the interest for the
borrowed coins (whether to the exchange or to other users), and fees for
opening a position with the exchange. As the chance to earn more increases, so
does the risk of losing more. The maximum we can lose is the amount we invested
in opening the position. This level is called the liquidation value. The
liquidation value is the value where the exchange automatically closes our
position, so we don’t lose any of the money we were loaned and only lose our
own money.
Example: if
we are talking about standard trading, leverage 1:1, the liquidation value is
when the position reaches a value of zero. As the leverage increases, the
liquidation value will get closer to our buying price. For example, If the
Bitcoin value is $1,000, and we bought one Bitcoin (long) with a leverage of
2:1. The cost of our position is $1,000 USD. In addition, we have also borrowed
a further $1,000 USD. The liquidation value of our position will be a little
over 500 USD – because, at that level, we lose exactly our initial $1,000 USD,
plus interest, and fees. Margin trading can also be against the market, so we
can also have a short position with leverage.
It is now
possible to trade margin on most exchanges. The advantages of leveraged trading
are very clear, and another important advantage is the security aspect. Crypto
traders should strive to minimize the number of coins they hold on exchanges.
Exchanges are considered hot targets for hackers, and in recent years there
have been several hackings of exchanges, including hacks of the major exchanges
too.
Trading on
margin allows us to open leveraged positions with no need to provide the
Bitcoin required, that way we can hold fewer coins on the exchange account.
Margin
Trading Tips
Risk
Management – When trading on margin it is important that there are clear rules
of risk management, beware of excessive greed. Take into account the amount you
are willing to risk, keeping in mind that it can be lost completely. Set clear
levels for closing positions, taking a profit or a stop loss.
Watch
closely – Crypto coins are considered to be assets with excessive volatility.
Margin trading of cryptocurrencies doubles the risk. Therefore, try to make
short-term trading leveraged positions. Moreover, although the daily fees or
margin position is negligible, in the long term, the fees can amount to a
significant sum.
Extreme
movements – Crypto trading sometimes has extreme fluctuations that occur in
both directions (“Deep”). The risk, in this case, is that the deep will touch
our liquidation value. It could happen where the leverage is relatively high,
so the liquidation value is relatively close. In fact, you can take advantage
of these deeps and try to set closing target positions, hoping the deep will
run over them, leaving you with a decent profit and then going back to the
previous price. Additional tips for trading Bitcoin and Altcoins.
The
Option to Short Bitcoin & Cryptocurrencies
A short
position basically means that we believe that a drop in the price of Bitcoin
will take place, and we want to profit trading against Bitcoin. Technically,
short positions work by selling the asset first, and then later buying it. You
don’t have to worry; the exchanges do this automatically for us.
The second
role for shorting Bitcoin is the option to hedge your portfolio. For example,
if your portfolio consists of five Bitcoin and we want to hedge against the
risk of Bitcoin’s decline, a 10X leveraged short position could be opened, and
it would be equivalent to 40% of our Bitcoin portfolio. To open the position
the amount required is only a tenth of it (10 times leverage).
That means that
we need just to hold 0.2 Bitcoin. So our Bitcoins are stored securely in cold
wallets. However, don’t forget the risk of trading with leverage (especially
the liquidation price of any position).
My
Picks
Bitmex
– Bitmex has
gained a great reputation in a short while, and many traders use it frequently
(like our team). Leading the margin trading in the crypto world, the exchange
offers up to 100X leverage margin trading, both long and short. It’s effortless
to operate and has good support. With our link, you can receive a 10% discount
for the first six months on the trading fees, upon registration.
eToro
– eToro is a well-known worldwide fully-regulated company. A trader with
an eToro account can trade CFDs on Forex, Stocks, Commodities, Options, and
Indices. In the field of crypto margin trading, they offer Bitcoin and all
other significant Altcoins for margin trading (like Etherem, Ripple, Litecoin,
Bitcoin Cash, Cardano and more). The main advantage lies in the fact that they
are a fully regulated company.
Another
advantage is that eToro offers social trading. This means you can imitate
successful traders and copy their trades to your portfolio.
You can join
and immediately start margin trading using a credit card (or Paypal and more),
or bank transfer. Margin leverage can be set up to 1:2 (1:30 for non-crypto),
and the start is smooth as a demo account can be opened free of charge.
Disclaimer: eToro is a
multi-asset platform which offers both investing in stocks and cryptoassets, as
well as trading CFD assets. Please note that CFDs are complex instruments and
come with a high risk of losing money rapidly due to leverage. 76% of retail
investor accounts lose money when trading CFDs with this provider. You should
consider whether you understand how CFDs work, and whether you can afford to
take the high risk of losing your money. Cryptoassets are unregulated and can
fluctuate widely in price and are, therefore, not appropriate for all
investors. Trading cryptoassets is not supervised by any EU regulatory
framework. This content is intended for information and educational purposes
only and should not be considered investment advice or investment
recommendation.
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