Crypto Margin Trading – A Brief Overview
Crypto margin trading – you have probably heard of it. Tradtionl margin trading is an old practice. However, it has entered the crypto world quite recently. So, what is all the fuss about? Let’s have a look at the practice and why you should use it.
Crypto Margin Trading – the ABCs
Before we decode crypto margin trading, let’s look into its roots – by rewinding to some basic concepts.
What is Trading?
Trading aims at returning a profit. So, trading means buying and selling assets with the aim of making a profit. Institutional trading looks at buying and selling stock, shares and currencies. Trading cryptocurrencies means buying and selling digital assets. Although the tradable assets differ, the purpose remains the same in both worlds.
What is Margin?
There are many different meanings to this concept. In business, margin refers to the difference between the selling price and production cost of a product. Hence, the profit margin. However, we are focusing on trading for today. In the trading world, it refers to the assets borrowed from a third party to make an investment. So, buying on margin essentially means borrowing funds to buy assets.
What is Margin Trading?
As mentioned above, margin refers to assets borrowed for making an investment. So, margin trading is a practice that allows trading assets by using additional funds provided by a third party. Margin accounts give traders access to more capital. This means that traders can leverage their positions. In essence, margin trading strengthens trading positions and traders can realize larger gains on successful trades.
What is Crypto Margin Trading?
Now that you are up to date with the definitions, let’s dive into the crypto market.
Traditional Markets vs Crypto Markets
The essence of crypto margin trading does not differ from traditional margin trading. Traditional markets fund margins by using an investment broker. In crypto, this is usually done by other traders. Their motivation is to earn interest on the funds they borrow for margins. In some rare cases, the exchange is the party that provides margin funds to traders.
How Does It Work?
So, how does it work in practice? Well, a trader first needs to invest a percentage of the total order when making a margin trade. The initial funds are called margin. Now, the trader will choose a leverage. AKA, the ratio of the borrowed funds. Exchanges have limits for margins to keep all parties safe. The leverage limits depend on the exchange.
Now, let’s look at a real use case. There are many margin trading strategies to go for. For instance, a trader commits €25 as a margin. The trader then decides to leverage the trade 3x. So, the trader borrows €50 to buy €75 worth of Bitcoin. Simple, right? Yes, margin trading is not complicated but still requires caution. So, regardless of the results of the trade, you need to return the borrowed funds. In this case, €50 and the fees.
Have a look at our comprehensive guide on What is Margin Trading to find out more!
Should I Start Margin Trading?
You have probably sparked an interest for margin trading by now. So, should you start margin trading crypto? Have a look at the pros and cons that help you decide.
Disadvantages of Margin Trading
As you can already guess, margin trading is riskier than regular trading. This is because traders borrow part of the funds that they invest. So, the borrowed funds need to be returned along with interest. Cryptocurrency prices can be volatile, so it is important to take some safety precautions.
Advantages of Margin Trading
Let’s start with the obvious. Traders with less funds can profit just the same as someone who trades with much bigger funds. So, margin trading can be a shortcut for growing your trading account and having higher returns.
Margin trading also gives you more opportunities for having multiple trades at one time. So, this will minimize the risk of trades. For example, opening a short position to protect against the losses of an unsuccessful long position in case the asset’s value unexpectedly decreases.
Now that you know more about crypto margin trading, why not try them out in practice? CoinMetro offers a margin trading platform with a 5x leverage and a great user interface.