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What is margin trading crypto?

The term “crypto margin trading” refers to the practice of trading with margin – the amount of money you borrow from your broker.

Margin trades can be used for short selling, which is when you bet on the price of an asset dropping. Margin trades are also used for bulls, or traders who think that the currency will rise in value.

Simply put, a cryptocurrency or Bitcoin margin trade enables investors to “borrow” money in order to access greater buying power and place larger positions than they would be able to do with their available funds.

Leveraged trading

It’s possible for a novice trader to be overwhelmed by the bewildering crypto margin trading environment. You’ve probably seen a huge glossary of terms like as leverage, liquidation price, margin calls, shorting, and more if you’ve ever conducted a brief search on how Bitcoin margin trading works.

Margin trading is also referred to as leverage trading, which refers to the amount by which a trader’s position may be multiplied. For example, if a margin trader opens a trade with 100X leverage, they will multiply their exposure and potential profit by 100 times.

Problems with margin trading and leverage

Margin trading, which allows you to magnify profits by 100 times, would undoubtedly catch the eye of any trader. However, margin trading has a major drawback. Using leverage in crypto trading to expand your position heightens the danger considerably.

Margin Trading Crypto: Simple Explanation 1

Margin trading is a high-risk, high-reward endeavor. There are several risks specific to the cryptocurrency market that should be considered when developing any leveraged crypto trading strategy.

When compared to traditional markets, the cryptocurrency market is largely unsupervised. In the Bitcoin margin trading environment, both short and long squeezes are not uncommon, as well as price manipulation.

Higher leverage comes with greater risk. A trader that establishes a high-leverage crypto trading position has a far shorter liquidation period. Before creating an position, you must compute the amount of price movement that would be required to liquidate it.

There are a variety of crypto leverage calculator programs accessible to determine the threat of liquidation, but it’s easy to do a short calculation to get an idea of the position’s liquidation price.

How much can you lose margin trading crypto?

If you are able to amplify your winnings 10 – 100x, does that mean you can lose that much?

Fortunately, the risk increase when margin trading cryptocurrency isn’t proportional to leverage. Trading with 100X leverage won’t multiply your losses by 100 times — it’s highly unusual to lose more than you put into a trade in that scenario. In extreme cases, however, disasters might theoretically result in overage assets exceeding committed funds.

How crypto margin trading works?

A trader must put up a deposit to start a position, known as the “initial margin,” and hold a specific amount of money in their account to keep the position going, known as the “maintenance margin.”

Different crypto exchanges provide various levels of leverage. Some crypto exchanges allow traders to open a position 200 times the value of their original deposit, while others impose a limit on leverage of 20X, 50X, or 100X.

When you use leverage, the exchange to which you trade holds collateral for the funds you take out. If you make a profit on a position, the exchange will return the cryptocurrency you used to open it as well as any earnings.

When you margin trade, however, the exchange will automatically close your position and “liquidate” it if it loses money. This happens when the price of the associated asset reaches a specific level known as the “liquidation price.”

Understanding margin calls & liquidation

The exchange that provides the capital maintains a number of controls in place to reduce its risk when you borrow money to margin trade crypto.

When the value of your assets in a margin trade falls below a specified level, it’s possible that the exchange will request more collateral to safeguard your position or have to close it forcibly.

When a position is liquidated, it’s sealed so that the trader who opened the position loses only the money they put in to begin with.

Let’s assume a trader opens a 2:1 long position with Bitcoin valued at $10,000. The position costs $10,000, but the trader has borrowed an additional $10,000 from the exchange. The liquidation price of the trade is therefore $5,000 — the trader has lost their original $10,000 collateral and is thus liquidated by the exchange at this price level.

Why margin trade?

Margin trading allows sophisticated traders to develop positions that are far more profitable than they would be able to do otherwise. For example, a fully closed position at 100X leverage will produce 100 times the return of a typical trade.

Margin trading in Bitcoin and other cryptocurrencies also allows expert traders to profit in a bear market by establishing short positions. A trader who anticipates a large price drop, for example, might put a portion of their portfolio on a short position in order to make money that compensates for the potential loss incurred by such.

Crypto margin trading exchanges

It can be difficult to choose the best crypto margin trading platform, since there are several today that provide leveraged trading. Trading on a crypto trading platform with the greatest possible leverage is not always the wisest choice. There are a number of criteria that must be weighed when picking margin trading crypto exchanges.

Different exchanges provide various degrees of leverage. Some margin Bitcoin exchanges, such as BaseFEX or PrimeXBT, allow for up to 100X leverage. Another important consideration is the interest rates offered by leveraged trading; depending on the length and leverage of your position, you may be charged extremely high interest rates.

Some margin traders use complex order types in order to take profit incrementally or set up stop losses, which lowers the risk of liquidation. Some margin crypto exchanges may offer fewer order type options than others. 

It’s also important to consider the funding and fiat support options of an exchange when margin trading. There are a few exchanges that offer both crypto margin trading and fiat deposits, which makes it possible to fund or withdraw from an account via wire transfer or credit card payments.

The KYC and AML requirements may affect which exchanges you can trade at. US Securities law may prevent US-based traders from leverage trading crypto on some platforms, so it’s important to check which platforms are available where you are at. 

Final thoughts

As you can see, some people are able to make a fortune with margin trading crypto but it’s a high-risk, high reward game and we don’t encourage it for everyone.

If you’re confident in your knowledge of the cryptocurrency market and can consistently predict price movements correctly, margin trading crypto or other digital assets may dramatically boost your earnings. However, opening the incorrect position at the wrong time might severely jeopardize your money.

Before you risk any large amounts of money, we suggest you learn the basics of market analysis with charting platforms like TradingView. 

You can get access to the best data, in real-time to help you become a more responsible and consistent trader.

See our TradingView review here to see how this charting solution can up your trading game.  

If you now understand how to margin trade crypto after reading this article and choose to margin trade it’s important that you choose the right margin trading crypto exchange and carefully assess your potential profits and losses before committing to a position.

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CryptoWhat was created in 2015 and has become one of the most trusted and well-respected sources of information on all things crypto. The blog's authors are dedicated to providing clear, concise, and jargon-free explanations of this complex technology, so that everyone can understand it.