Crypto Margin Trading: Major Information About It
Margin Trading Cryptocurrency - All You Need to Know
Despite the generalized bearish crypto market of last months, cryptocurrencies still represent promising sources of revenue. However, “hodling” is not the best way to profit from crypto anymore. This term refers to buying digital coins and holding them for a long time in hopes of making a profit if their price increases.
Instead, it would be best to use more advanced trading strategies to make significant profits with cryptocurrencies. Margin trading allows you to execute more complex and active trading strategies. As a result, your gains can significantly increase. But so can your losses. So, if you are interested in this trading option, we tell you all you need to know about crypto margin trading in this article. Let’s begin!
What Is Margin Trading Crypto?
In its simplest form, margin trading consists of opening a trading position with leverage by borrowing crypto from the exchange where the operation takes place. Let us illustrate it with an example. Assume you want to buy Bitcoin now, expecting a sudden price growth. You can opt to buy without leverage. However, your return on investment (ROI) could be more significant with leverage via Bitcoin margin trading.
If Bitcoin increased by 10%, you would have a 10% ROI without leverage. However, opening a margin position with a 2X leverage would have yielded 20%. Consequently, 25X leverage would have yielded a 250% ROI. A similar thing happens with Ethereum margin trading and other cryptocurrencies.
Trading Steps
If you want to use margin trading to generate more significant profits, you must open an account on a crypto exchange that offers this trading option. There are various platforms, including major centralized exchanges. On most platforms, you must follow these steps:
- Transfer funds to your account. You usually transfer the funds from your wallet. If you need to transfer a specific coin, you can get it at LetsExchange.io. Our instant exchange supports more than 4,000 digital coins and tokens.
- Borrow from the exchange. Once you log into your account, there must be a button to do it. Read all the conditions of the loan before you borrow any money.
- Trade. Usually, you have to trade your crypto on a particular margin trading page provided by the exchange.
- Repay. Pay back the loan to the exchange with its related interest and fees.
Each exchange sets its own conditions to support margin trading. Make sure you know them all before you choose a platform.
Why Choose Margin Trading?
The primary motivation to opt for margin trading is increasing the ROI of your crypto trades. To have more chances of success, make sure the exchange offers the following:
- Many trading pairs
- Competitive fees
- High liquidity.
Margin Trading Tips: Read before You Trade
While margin trading can significantly increase your crypto gains, it can also lead to enormous losses. As a risky activity, margin trading is not suitable for beginners. We have compiled a few tips to help you have more successful margin trading.
Start Trading with Small Sums
Novice traders often make the mistake of starting margin trading with large amounts of crypto. Please don’t do it. Always start margin trading with small amounts until you get the necessary confidence and skills to borrow more considerable sums.
Make Sure You Understand Fees and Liquidations
Before you start trading, take some time to learn everything about the fees you have to pay. Make sure the fees you will pay are not larger than your profit. Remember, each exchange sets its fees and conditions. Likewise, make sure you know the liquidation price for your position.
Implement Risk Management
As said, margin trading is risky. Keep in mind that you can lose your investment entirely with this activity. Therefore, you must set clear risk management rules when trading on margin. Set stop-loss levels and other orders that will help you prevent massive losses.
Make Short-Term Margin Trading
Crypto trading is inherently risky because of the high volatility of cryptocurrencies. Margin trading makes it even riskier. Hence, try to make short-term margin trading positions. Additionally, avoiding long-term positions will help to reduce the fees you will pay at the end.
Monitor the Crypto Market
Different factors can affect the price of Bitcoin or any other cryptocurrency. For example, SEC regulations can significantly alter the crypto market. Hence, before margin trading, pay attention to the current market status.
Main Risks of Crypto Margin Trading
Margin trading allows earning more significant profits from your cryptocurrency. However, as the chance to earn more increases, so does the risk of losing more. How much can you lose? The maximum loss you can incur is the total amount you invested in opening the position. This level is referred to as the liquidation price. The exchange automatically closes a position when the position’s value reaches the liquidation price. In this way, the exchange does not lose any money borrowed by the trader.
In standard trading with leverage 1:1, the liquidation price is zero. At that point, you would lose all your investment. But as the leverage increases, the liquidation price will get closer to your buying price. To calculate the percentage the value of your position can change before reaching the liquidation price, you should divide 100 by the leverage level. So, if you trade with 1:25 leverage, you divide 100 by 25, meaning a 4% move will get your position liquidated.
Conclusion
Margin trading has clear advantages over standard trading. However, there are considerable risks involved. As a result, you should try this trading option only when you have a much better understanding of risk management in crypto trading.
FAQ
Is Margin Trading a Good Idea?
Yes, it is. Margin trading allows you to open positions that can yield more significant returns without having all the digital coins required for the trade.
Can You Make Money from Margin Trading?
If used properly, you can make money with margin trading. But remember, some risks can make you lose money also.
How Is Margin Paid Back?
At the end of your trade, the exchange will automatically withdraw the corresponding loan, interests, and fees from your account.
Disclaimer
Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn’t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.
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