By now, all of us know the fact that cryptocurrency trading is both risky and rewarding. One needs to be smart and learn the basics before putting a considerable amount of money on it.
You put $10,000 in crypto and a couple of days later, it is valued at $20,000! Wow!
But you need to understand that there is an equal risk of your initial investment getting reduced to $100 in a day or two. Yes, that’s right.
So it becomes important for us to discuss an important concept in trading which can be rewarding but also risky – Margin Trading. But it’s not all bad if you use it properly to achieve your investment goals.
What Is Margin Trading?
Margin Trading is an act of borrowing additional money or cryptocurrency by leveraging the number of cryptocurrencies that you already own to buy additional cryptocurrencies.
Margin Trading is also referred to as margins or leverage trading and the idea is an old age method used in the traditional markets.
The concept was born in the US and is now practiced in numerous exchanges around the world and has been incorporated in the cryptocurrency world too.
But in traditional markets, there are many rules and regulations on margin trading, while the cryptocurrency margin rules are quite simple and not as complicated. The basic operating principle, however, remains the same.
Let me give you an example:
Assume, you want to make an investment of $2000 in BTC but you only have $1000. So now to bring in the extra $1000, you borrow that through the margin of 2:1 (2x, it means for every dollar you have, you will get extra one dollar to invest).
Now imagine the BTC price increases by 50%, and so has your investment. So the $2000 you invested is now worth $3000. You can liquidate and pay back $1000 to the lender and enjoy your profits of $1000. (Assuming 1 BTC costs $2000)
But on the flip side if the BTC price decreases by 50%, your investment of $2000 has also reduced to $1000. In this case, the lender needs to be protected and he/she has the first right to claim the remaining $1000, so this goes to the lender. Now, your initial investment of $1000 is also lost and now you are left with nothing.
So you see, this way, the margin can be very rewarding as well as highly risky and that’s why it is not recommended to margin trade until unless you understand what the risks are.
See this short video to understand more about margin trading:
Who Gives This Extra Money or Crypto Invest & Why?
I know what are you thinking. You are thinking who provides this extra money or BTC to the trader to margin trade and why.
Well, brokers or individuals here act as lenders and provide their money or BTC to margin traders on a fee or interest rate.
And whenever the margin trader’s portfolio performs poorly according to the agreed conditions, their position is automatically closed by the broker to refund and save the lenders so that they get their interests and principal first.
On the flip side, if the margin trader’s portfolio performs well, lenders are regularly paid their interests according to the trade terms.
And that’s why it is also called Leverage Trading. For example, 50:1 leverage, means $2,000 of equity/BTC is required to purchase an order worth $100,000. 400:1 leverage means $250 is required to purchase an order worth $100,000.
Now, I know some of you might want to know where you can trade cryptocurrencies on a margin.
Well, there are some dedicated margin trading exchanges for doing that.
Crypto Exchanges Providing Margin Trading Facility
Exchanges providing margin trading option for cryptocurrencies are:
Always remember one thing – margin trading is not for noobs and you need to take into account the wild volatility of the crypto market too.
That’s why always stick to basic investing principles and never invest more than what you can afford to lose.
If you are not a pro margin trader, first try the usual 1:1 trading on exchanges such as these: 7 Best Cryptocurrency Exchanges In The World To Buy Any Altcoins
That’s all from my side in this article and I hope you enjoyed it.
Now it is time to hear from you: Do you trade cryptocurrencies? Do you indulge in margin trading? Where do you trade or margin trade cryptocurrencies?
Please share this article with your network if you find it useful!
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