Margin Trading In Crypto: All You Need To Know
Understanding Margin Trading
Margin is referred to as a sum of money borrowed from a brokerage firm to facilitate buying an investment. The difference between the borrowed amount from the broker and the total value of securities held by the investor.
Margin trading provides you the facility to buy assets that are unaffordable for you by paying a margin of the asset’s value in the form of either cash or securities held. The remainder is loaned by the broker or exchange, allowing investors to leverage positions in securities. The margin can be settled only in case the position is squared off, and to gain a profit, the investor must earn a higher profit than the margin; otherwise, he has to face losses.
Although margin trading is useful in the case of investors looking at encashing price fluctuations on a short term basis, it includes risks of higher losses, maintenance of minimum balance, and the possibility of investors’ assets being liquidated.
How Margin Trading in Cryptocurrency Works
Margin trading with cryptocurrency allows investors to borrow against their current funds to trade in cryptocurrency on margin. Margin enables the traders to gain greater exposure to a specific asset, in this case, the cryptocurrency, by borrowing capital on an exchange. Margin trading here helps in multiplying the tradeable capital.
To illustrate, let’s say the investor puts in $50 leveraging 2:1, and borrows another $50 to buy $100 worth of Bitcoin. The only catch here is that the investor pays back $50 plus the fees no matter what happens, profit or loss. The exchange generally ‘calls in’ the margin trade as soon as the price is hit where the money starts getting lost, ensuring they get their loaned amount back safe.
The exchanges give several leveraging options, like 2:1, 4:1, 100:1, and many more. The leverage can also be used to speculate or hedge.
How to determine the best margin trading exchanges?
Given the high level of competition and a wide range of choices, it is difficult to judge which exchange(s) is worth giving time and effort. Some of the factors mentioned below might help you make a better decision by asking yourself some questions.
- Leverage: What is the leverage offered at the exchange? Do you have the capacity to qualify for that kind of leverage? Is it too high?
- Liquidity: Is the level of liquidity found at the exchange appropriate for your trading transactions?
- Trading Options: The vast possibility of choices surely attracts the investor. Does the range of options suit your needs? Could you trade as per your ideas and decisions?
- Fees: The most critical factor is the fees. The rate of interest and the commission charged or fees levied differ from exchange to exchange. Do the costs justify your trading goals? Is it fairly presented given different exchanges in the market?
- Security Measures: Is the exchange secure enough to be trusted with your funds? Is it secure enough to be trusted with your precious data?
- Payment Methods: Some exchanges only allow cash payments, while some also accept other forms like existing crypto securities. Given the possibilities, choosing the suitable is the investor’s decision.
- Geographical Restrictions: Imagine yourself in a place where you cannot access the whole plethora of facilities provided by the exchange because of the geographic restriction. To avoid this, the investor must get information about it beforehand.
The ultimate objective is to find the one exchange which suits your needs. It might be a cross of different factors but for you the best available.
How to Margin Trade Crypto
Margin trading on cryptocurrencies has inherently higher risks. This is because there are high levels of volatility in the crypto market. The necessary processes involved in margin trading cryptocurrencies are:
- Call Prices: Given the high fluctuations, the investor and the exchange are always in a position of high-risk losses. Therefore, the deals ask for high collateral to cover their losses in case of a price drop. Although, if that isn’t sufficient, ‘margin calls’ are made when the funds are on a decline whereby the investor has the option to either stop or risk their assets being liquidated.
- Long and Short: These are short term measures when the prices are anticipated to get short term benefits. Going long means anticipating prices to rise while going short means anticipating prices to fall.
The key difference between regular margin trading and margin trading in crypto is that you borrow to increase your buying power potential to access higher profits under the latter.
But before all that, you should understand how to start. The following steps would help:
- Registration: An account is created with a crypto exchange with which you want to margin trade. Consider Delta – arguably the best crypto derivatives exchange in the market.
- Funding: Every trade needs funds. The exchange should be funded with your securities on your created account.
- Navigation: Understanding and navigating the trade window would help in facilitating margin trading.
- Defining Parameters: Once all the above procedures are done, you need to define your order parameters which include selecting the market, leverage position, type of crypto, etc.
Crypto Margin Trading Strategies
- Careful: If you are an inexperienced trader, be careful your decision of margin trading crypto given it is volatile and hence comes with risks, suitable for experienced traders.
- Slow Start: A low level of leverage should be started in order to minimize incoming risks.
- Research: Get a thorough understanding of margin trading crypto by going through different sources of information like journals, magazines, and websites along with researching about how the desired exchange works. You can also check out the Delta blog for more on crypto trading.
- Identify Trends: Understanding how the market moves will help in making better informed and safe decisions.
- Setting Goals: Goal setting helps to keep your expectations low and educate yourself, finally enabling you to minimize your losses.
Margin trading in cryptocurrency involves huge risks. But understanding how the exchanges work, how margin trading happens, and making correct and informative decisions helps one improve his position in the market and enjoy gains.