Crypto margin trading is one of the leading cryptocurrency trading methods you can earn from in this market. There are many ways you can earn passive income from the cryptocurrency market. And I’m sure you’ve heard of the term ‘shorting’ bitcoin, margin trading, or trading cryptocurrency with leverage.
All these terms mean the same thing, and traders use them interchangeably. On that note, it’s easy to get confused about what crypto margin trading is. Thankfully, this article will give you a detailed description.
What is crypto margin trading?
Any newbie trader always has challenges understanding the margin trading meaning. But don’t worry, this section is for you. Before we get started, I’d like to inform you that margin trading has a higher trading risk than regular trading. And on that note, make sure you only trade on cash that you can afford to lose. Now that that’s out of the way, let’s get down to business.
The simplest explanation of margin trading is ‘buying on credit.’ That’s why this type of trading is also known as leverage. To be more specific, leveraging (see what I did there? I used the term leveraging to replace margin trading. Now it doesn’t sound so complicated, right?) involves borrowing money to boost trade value.
Margin money is a loan that comes with interest and collateral, which the broker sets. Likewise, the loan interest will depend on the broker and your relationship. Typically, stock and cash are common forms of collateral that a margin trader can use. These factors are also based on the account’s size and trade security. To counter or manage the loss, traders must maintain a margin balance that will cover any diversions.
Why margin trade on crypto?
Without a doubt, this trading technique ensures you can leverage and get high returns for your speculation. For instance, if you want to use $10,000 worth of bitcoin but you only have $5,000 to speculate the price of bitcoin, you can work with the 2:1 leverage or 2X. Yes, that’s the meaning of those symbols in your margin trading platform. With that, you can maximize the profits of your trade. When you are not entirely confident about your positions, it’s best to use the lowest leverage possible. That should reduce the risk of high losses if the trade doesn’t go your way.
With margin trading, you can counteract the losses you are likely to suffer during the trade. Support if you had only $10,000 but only want to use $5,000 on a specific position. If the broker allows it, you can hedge the $5,000 with a 50% leverage, and your new balance will be $15,000. That means if the trade moves in your direction by, let’s say, 10%, you will get $150. However, if the trade moves in the opposite direction, you stand the chance of losing the $150.
How does Margin trading work?
As I said earlier, crypto margin trading acts as a loan that gives you a better market position. Whether you speculated on a rise or a fall in a specific coin’s market price value, margin trading makes it easier to maximize your profits. However, even during this trade, the exchange still reserves some control over your pending orders. For instance, your crypto exchange will likely ask for more collateral if the market moves against your speculation, or it will forcibly close the position.
That is what is known as the margin call. Typically, your cryptocurrency exchange will notify you in advance before that happens. A margin call occurs when the asset’s value in the margin trade goes below a certain set point. You will get a notification over email, but you should continuously monitor your positions.
Whenever the trade position becomes too insecure, the cryptocurrency exchange will automatically close the position. That is what is referred to as the margin liquidation level. The liquidation only happens to ensure the capital loss only liquidates the trader’s cash when the position was opened. That is why trading cryptocurrency even through margin trading requires skill, time, and consistent practice. More importantly, it’s not a get-rich-quick master plan.
Tips on crypto margin trading
Now that you have an idea of crypto margin trading, here are some neat tricks that will prove to be helpful in your endeavour;
- Start small: if you are only starting on margin trading, go with the safe bet. That means only use low leverages and bank on cryptocurrencies you’ve intensively studied. That will reduce your risk and increase your focus on the significant leverage size.
- Have goals: with margin trading, you need to set realistic goals. That includes having a clear profit strategy with long-term gains and not short-term. Above all, always set a stop loss level and exit position in every trade you have.
- Pay attention to the interest and fees: each crypto exchange will likely have a different price and interest rate. And no crypto exchange offers free margin trading. You will have to incur a small cost for this service. As such, always check on the interest and fees before entering any position.
- Research outside the market: the prices of cryptocurrencies are affected by what is happening outside the chart. Therefore, you will need to keep yourself updated with the current evidence and how a specific coin is fairing. That includes following the CEOs of particular coins and learning about their roadmap to speculate the price movement correctly. Otherwise, you will be speculating price changes blindly.
Take Away Message
And now you can start trading on crypto margin trading. Only begin by researching a few prominent coins and spend time checking their price chart. Thankfully, most cryptocurrency exchanges will readily offer this information.
In a nutshell, margin trading could bring substantial profits compared to traditional trading. But it would be hard to ignore the risks involved in this type of trading. You could risk losing all your capital without the right strategy. So, take your time and learn the skill before earning from it.