What Is Margin Trading in Crypto?

UTC by Adedamola Bada · 8 min read
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What Is Margin Trading in Crypto?

In this guide, you can find all the information about marging trading, which is yet another strategy proposed to help crypto traders get the best out of the crypto economy.

This is yet another strategy proposed to help crypto traders get the best out of the crypto economy. Margin trading provides its users with leverage by giving them access to more funds than they already have so that they can have more buying power for their transactions.

Let’s say you want to buy Bitcoin worth $100 and all you have is $25, you can use the $25 and leverage of 4:1 to access an extra $75, thereby arriving at the $100. At the end of the transaction, whether successful or not, you’ll be required to pay back the $75 with additional fees.

What Is Margin Trading?

Margin trading is an asset trading strategy that allows users to make transactions with another person’s funds, in this case, usually a third party. Unlike conventional trading accounts, margin accounts provide traders with a higher amount of capital to leverage their positions effectively.

Basically, margin trading helps traders to boost their results with a higher profit margin on successful trades. In traditional markets, the loans used by traders are sourced from investment brokers, while in cryptocurrency trading, fellow traders provide the funds. In some cases, albeit rare, crypto exchanges also help their users with margin funds.

How Does Margin Trading Work?

Margin trading works hand in hand with the trader, in the sense that the trader will be required to make a financial commitment of his own for the process to go through. Usually, a percentage of the total order value has to be paid by the trader for it to be valid. It means that if a trader wishes to make a $100,000 trade at, say a 10:1 leverage, a $10,000 capital will be required of the trader for the deal to proceed.

There exist different rules and leverage rates for margin trading based on the trading platform and market in question. Like in the stock market, the typical ratio is 2:1. Futures contracts have a leverage of 15:1. For Forex brokerages, the leverage for margin trading is set at a ratio of 50:1, but in certain cases, the ratios of 100:1 and 200:1 are used. In the aspect of cryptocurrencies, the leverage ranges from 2:1 to 100:1. The ‘x’ terminology is often used to describe leverage in the crypto trading community, for example, 2x, 5x, 10x, 50x, etc.

Margin Trading in Cryptocurrency Markets

Naturally, margin trading comes with a lot of risks when compared to regular trading, but in cryptocurrency trading, the risks are even greater. The high volatility of the crypto market does not help the matter. In fact, it contributes to the reason why margin trading is a big risk. Though there are ways to cushion risks in the crypto market, people who are still new to this type of trading should most certainly avoid margin trading.

Traders are encouraged to acquire the right trading skills like charts analysis, identifying trends and determining entry and exit points. It will help reduce the risk of margin trading. So before taking the plunge of leveraging cryptocurrency during trading, users are advised to, first of all, understand the technical analysis of the market and have a good experience of spot trading.

Advantages and Disadvantages of Margin Trading

Margin trading has its advantages but one advantage that attracts traders the most is the possibility of larger profits. Aside from that, traders can utilize margin trading for diversification, which is a situation whereby traders can use small investment capital to open several positions. Also, a margin account gives traders the choice of opening positions more quickly without going through the process of pushing large amounts of money into their accounts.

With the advantages come the disadvantages. Margin trading can really cause damage to a trader in the form of losses if the trade is unsuccessful. In fact, the losses resulting from margin trading is so bad that they go beyond the trader’s initial investment.

Even a little change in the market price has the potential of causing devastating losses for traders, depending on the chosen leverage. This is the reason why investors are advised to adopt proper risk management strategies if they want to use margin trading. Also, traders should use risk mitigation tools like stop-limit orders.

Exchanges Offering Margin Trading

This list comprises of the most popular exchanges that provide the option of margin trading to their users.

Binance

Not long ago, Binance, the leading crypto exchange in the world, announced the inclusion of margin trading for XMR and NEO. 

The new margin pairs are as follows: XMR/USDT, NEO/USDT, XMR/BTC, NEO/BTC. Binance also has a range of assets and trading pairs that it supports for margin trading such as LINK, USDC, BTC, ETH, XLM, TRX, ONT, BCHABC, ETC, XRP and lots more.

Other things offered by Binance are borrowed limits, daily interest rates, Index Price and marginable pairs.

BaseFEX

BaseFEX comes in a class of its own as a unique crypto derivatives exchange. It was designed by professionals who are well versed in the financial industry. Though the exchange is quite new, it has already captured attention with its claim of providing margin trading for HT, ATOM, BNB, BCH, LTC, TRX, OKB.

In addition to this, it has an order matching engine that can be described as reliable, secure and extremely fast, to help users trade perpetual contracts for the majority of the popular coins with 20-100x leverage.

BaseFEX has the lowest taker fee in the world, especially for the BTC/USD pair, and its UI is very neat and organized compared to its peers.

Bitmex

Having been in existence for quite a while, Bitmex is one of the pioneers of crypto margin trading. The exchange has a team of brilliant and dedicated economists, and developers, which is a must-have if the business wants to thrive as it is currently doing.

Right now, only the following pairs can be traded on Bitmex margin trading platform: BCH, ETH/USD, XRP, BTC/USD, EOS, ADA, TRX, LTC.

Bithoven

This crypto exchange is still an upcoming one, though it holds a lot of promise. It was developed by professionals who are well experienced in finance, blockchain, and trading. The exchange has more than 100 listed cryptocurrencies and an army of advanced trading tools that will make your cryptocurrency trading a better experience.

Bithoven also supports crypto margin trading, and BTC acts as the nominal margin currency on the platform, used for margin trade of crypto assets like ETH, XMR, LTC, BTC, EOS, Dash, BCHABC, etc.

Bithoven offers its users access to a professional trading platform like Meta Trader 5. Its interface is both multifunctional and user-friendly.

Kraken

Kraken was established in 2014 and has so far risen to be recognized as one of the top crypto exchanges in the world.

The exchange platform is based in San Francisco, USA, and is one of the few US crypto exchanges that offer margin trading to US crypto traders.

Kraken allows margin trading for the following digital assets REP, BCH, XMR, BTC, ETC, XRP, ETH on its platform against the following currencies: EUR, USD, ETH, BTC.

CEX.io

CEX is a UK=based cryptocurrency exchange of high repute which offers margin trading for crypto investors.

It has been in the crypto business since 2014 and allows the following pairs to be traded on its margin trading platform: ETH/USD, BTC/EUR, BTC/USD, ETH/BTC, BCH/BTC, BCH/USD.

Poloniex

Poloniex is not a newcomer in the crypto industry. Users can perform the usual crypto trading as well as margin trading on the platform. Though the volume on the exchange is very low, users can still perform margin trade as the platform has provided more than ten crypto pairs for its users. However, all pairs include BTC. 

Are Margin Trades Regulated?

Presently, Japan is working towards regulating crypto margin trading beginning from next year. The Japanese government is looking to put a cap on cryptocurrency margin trading in alignment with Forex trading.

Furthermore, crypto exchanges within the country that provide margin trading to users must register with the government within the space of 18 months, which will begin counting immediately the law goes into effect, and this is expected to happen April in 2020. Exchanges that fail to comply with the rules will be under the threat of being closed.

Conclusion

Without any doubts, margin trading is a rewarding tool for traders who want to enjoy higher profits from successful trades. If applied properly, margin trading has the ability to bring traders remarkable income and also to help them diversify their portfolio.

As we have already discussed above, the trading method can also hit traders where it hurts by making them experience larger losses because its risk level is very high. Therefore, this trading method is recommended for highly skilled traders only. The fact that cryptocurrency is already known for its unstable nature should make traders take extra precautions when it comes to using margin trading.

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