For Beginners: What is Margin Trading?
Should I do margin trading if I’m just starting out in the crypto market?
We’ll answer that question towards the end of today’s brief educational guide, after we’re done with the underlying basics of crypto trading on margin.
What is margin trading in crypto and what is it about? Here we go!
What Does Margin Trading in Crypto Mean?
Margin trading in crypto allows traders to borrow money against their funds to trade virtual currencies on margin – on an exchange. To try and put it differently, exchange users can leverage their crypto or fiat assets by borrowing funds to increase their buying power.
To make it even easier to understand, margin basically refers to the assets borrowed from a third party to make an investment. So buying on margin literally means borrowing funds to buy assets.
We most definitely recommend you to study our comprehensive guide on what margin trading is.
Let’s have a look at a theoretical example. With margin trading, you can buy, say, $25,000 worth of bitcoin with only $5,000, that is, leveraging 5:1, or 5x.
This means that you invest $5,000 and you borrow the other $20,000 from an exchange. As a result, because you are borrowing money, you owe the money back along with any applicable fees. Please read all the terms and conditions of the selected exchange carefully before starting to margin trade.
What is Leverage?
As a rule, crypto exchanges have a range of leveraging options. But what is leverage in the first place?
Leverage is an investment strategy that implies using borrowed funds to amplify returns from an investment. In other words, you borrow capital to make an investment.
Traders mostly use leverage to increase their buying power in the market.
Margin vs Leverage
The two terms may look very similar, just like coins and tokens, but are not the same.
Leverage refers to taking on debt, whereas margin is debt used to invest in other financial instruments – for example, cryptocurrencies.
As a margin trader, you can borrow money from an exchange for a fixed interest rate to buy an asset of interest and expect to receive high enough returns. The main point is, however, that you can use margin to create leverage.
Right… Should I do Margin Trading?
Margin trading comes with a risk – just like any kind of financial activity – since it is a financial activity. But this investment type is riskier than regular trading. Why? Primarily because you borrow part of the funds that you invest. Not only that, the borrowed funds need to be returned along with interest and all the applicable fees.
Knowing how the market behaves and having strong technical analysis skills will not eliminate the risks completely, but they will give you a clear advantage. All things considered, we would recommend margin trading for more experienced traders.
However, if you really feel like trying it out, do a thorough research on the subject and read every file you can find!
Why Choose CoinMetro
Ready to try out margin trading on a fully regulated and licensed exchange?
With CoinMetro, you can take your trading game to another level with 5x leverage.
Our Margin Trading platform was built by – and for – professional traders. It features multiple collateral options including fiat and crypto.
There are also one-click trade management tools available for you.