By
Steve Muchoki
April 19th, 2024
In this article, we will outline the characteristics of margin trading and more importantly the best exchanges where you can get into this type of trading using your favorite cryptocurrency.
When you are considering different options to buy and sell cryptocurrencies you may come across with the term “margin trading”. But, what’s this trading technique all about?
Why Do People Make Use of Margin Trading?
In a nutshell, margin trading means using borrowed funds from a lender to increase your final return and betting on either an asset’s price going up or going down. As you can probably imagine, because of the risk involved in trading cryptocurrencies some people may choose not to put all of their funds into an exchange. Also, traders could simply not have enough funds as they would like to dedicate into actual trading.
For these cases, margin trading works as an additional capital which can be used as a sort of leverage. In essence, traders are using their money as well as some additional amounts which come from any broker. Sometimes, the lender can be an individual, or it could be a group of people, or a crypto exchange.
If you think trading without holding the assets sounds risky then you are right. Margin trading can be a high-risk trading option but at the same time, it’s a popular option because it also carries a high reward potential when compared to standard trading.
How Do You Use Margin Trading?
When considering margin trading, you should think about the cost of using this option. Lenders are to be paid interest for the borrowed coins, there may also be fees associated for beginning a trade using leverage in the first place. Hence, the actual cost of using margin trading will depend on these factors which together are commonly referred to as the “liquidation value”.
Traders are faced with a choice between two scenarios. The first option is opening a long position, which is buying bitcoin or any other cryptocurrency with funds borrowed from a lender, with the purpose of selling it later at a higher price. The second scenario is to open a short position which basically means selling bitcoin or any crypto borrowed from a lender, with the intent of buying it back later at a lower price. Either if you are betting on a bullish price increase or a bearish price reduction you can still use margin trading to increment your potential rewards.
Keep in mind that the maximum amount you can end up losing is how much it costs to open a position, whether long or short, plus every one of the fees mentioned before. The liquidation value is the value where the exchange automatically closes a position, so you don’t end up losing the money you were loaned and only lose your own funds. Ultimately, traders cannot lose more than what it originally cost them to open a position.
Example of Margin Trading on a Bullish Market
Here’s an example of how margin trading works. Let’s say one bitcoin is priced at $8,000, and you buy exactly one bitcoin to open a long position because there is a bullish trend and you expect the price to rise up. The cost to open that position is $8,000. But, in addition to this, you have also borrowed from a lender another $8,000, this totals to 2 BTC at the current market price of $8,000.
Let’s say the price of bitcoin goes up to $8,500 briefly after you open your position, you can now sell those 2 BTC for more than what it costs to get them. The difference after you close the position is your profit. This is a classic example of using 2x leverage which gives you double of what you get from standard trading.
Top 5 Places Where You Can Use Margin Trading
The most important part of using margin trading will always be in choosing the right exchange to do it. An exchange that offers trustable and reputable brokers and that is good at providing leverage of all kinds. There are exchanges out there that offer up to 100x, in other words, 100 times more than what you actually hold in crypto. But, you should always look at all of the differences, pros, and cons of each platform. The good thing is, that we have done the homework for you. Here are the best exchanges and platforms where you can make use of margin trading.
Bitmex is a crypto exchange that offers up to 100x leverage margin trading, both long and short. But keep in mind that while cryptocurrency/fiat currency pairs are available on Bitmex, the exchange’s base currency is Bitcoin and it does not support fiat currency deposits or withdrawals.
eToro is a social trading and multi-asset brokerage company. Crypto margin trading is available on Bitcoin and other cryptos. What’s their downside? They do not accept bitcoin deposits or withdrawals and has limited cryptocurrency listings when compared to other exchanges.
CEX.io is a centralized cryptocurrency exchange that offers margin trading and currently offers Bitcoin margin trading with 1:2 and 1:3 leverages on BTC/USD, BTC/EUR, and ETH/BTC pairs. Their main disadvantage is that fees are a bit high with users having to cover a fee for opening a position and even a fee to prolong a position if they wish to do so.
Prime XBT is another cryptocurrency exchange that provides margin trading options with leverage up to 100x in five different cryptocurrencies. The problem is that it’s relatively unknown and does not have a lot of name recognition. Also, there are no fiat deposits available and there is no API for trading accounts to use and automatize their trading. No mobile or PC apps are available yet for this platform.
BTCNEXT is another cryptocurrency exchange platform that offers margin trading for both long and short positions. Being developed by Platinum Q DAO Engineering, which has also brought USDQ and KRWQ to the market, it offers quite competitive fees and pairs with the US Dollar-pegged and Korean Won-pegged stabecoins USDQ and KRWQ. This platform is one of the most complete sites where users can take advantage of an advanced function like margin trading. BTCNEXT exchange is looking to edge together innovative solutions in collateralization. They plan to achieve it by using stabilizing mechanisms and neural networks for high-endurance stable coins.
Final Recommendations
Margin trading is an advanced technique where you can make a lot of profit or lose your funds with a blink of an eye. Before you use this type of trading you need to understand all of its consequences and read the platform’s terms and conditions very carefully as fees and other company-specific policies can make a huge difference. Still, margin trading is an effective way to continue making profits even on price reductions by using short positions.
Platforms like BTCNEXT, eToro, CEX.io and others, make margin trading more accessible and mainstream simply because of the quality of the service along with very competitive fees, so expect to see margin trading to become more and more popular throughout the crypto scene.