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As it is said margin trading is not everyone’s cup of tea, the same goes for the crypto sector. Moreover, it is, even more, riskier when combines with cryptocurrencies because they are already volatile in nature. If you are planning to try out crypto Margin trading for the first time, there’s no worry as long as you are being safe. By being safe we mean, not risking too much capital and taking all the precautions and following a proper strategy. After all, you are only going to learn it after trying it.
If you are investing in cryptocurrencies for the very first time, let’s avoid it and start with normal trading. Remember only by step by step you can reach the success point, there’ no short cut and definitely no easy way. You can read our beginners guide about how to invest in cryptocurrencies for some knowledge. Today, we will clear all your doubts about Margin trading and make you learn everything possible about it. So, let’s get started right away.
What Is Crypto Margin Trading?
In some words, crypto margin trading is trading by borrowing cryptocurrencies. Here, the crypto exchange works as the broker, from where you borrow cryptocurrencies at high-interest rates. This way you can earn high profits with margin trading in the market goes in your favour but if things didn’t happen as you imagined there are chances of high losses too.
For instance, take the example of Bitcoin. Now you think that its price is going to increase in a given period of time but don’t have enough capital to take profit of it. So what you can do is use crypto margin trading exchanges like Bitfinex that offers Crypto Margin Lending and borrow a relatively higher amount of cryptocurrencies by investing less amount. Then when the price of Bitcoin goes in your favour, you’ll earn high profits. Sounds easy right? Practically, it is not that easy because the price does not moves in your favour most of the time.
Note that for margin trading, you need to have proper knowledge of cryptocurrencies as they are associated with high risk. If you want to know more about the cryptocurrencies that can provide you with profits, read our guide best cryptocurrencies to invest in 2020.
Understanding Margin Lending
In order to understand crypto margin trading, you must understand the concept of leverage. Now, what is leverage? When you trade on margin, the increased buying power you get is called leverage. The more the leverage rate, the higher will be the profits and the losses. For example, if you select to a leverage rate of 2X with a deposit of 5000, you can invest twice of the money you are investing i.e. 10,000. You can leverage minimum 2X to maximum 100X and even more. It depends on the crypto margin lending platform what leverage position it is offering you.
After you start trading, if everything goes in your favour, your interest would be amplified according to the leverage you’ve selected. But if the market doesn’t move in your favour, you will need to pay the losses to the exchange.
Going Long Vs Going Short
There are two ways of earning profit from crypto margin trading i.e. Going long vs Going short. In the first case, you buy cryptocurrencies and then wait for the price to go up to earn profits. However, in the second case, you sell the cryptocurrencies at the current price and wait for its price to go low so that you can it back in less.
If you think that the price of the cryptocurrency will go up, you can open a long position or go long on it. Then if the prices go as you expected you earn the profits from your leverage.
Alternatively, if you predict that the cryptocurrency price will go down, you will sell your holding at the bet that the price will go down. This way if the price decreases in real, you can buy back the coins and save yourself the profit. Again, if the market doesn’t move as you expected, you will lose your crypto or have to buy it back at a higher price.
Terms Of Margin Trading
The first condition of crypto margin trading is that you have to keep paying the interest for the cryptocurrencies you’ve borrowed from the exchange until you pay them back in full.
Secondly, the exchanges require you to manage a certain amount in your account in case the position falls. This minimum amount is called Maintenance Margin that you need to maintain in your exchange account as long as your position is open.
At last, comes the margin call. According to which if your balance goes below the maintenance margin because of the fall in position, the exchange will contact you to add more funds into your account. However, if you cannot do that, the exchange will liquidate some of your assets to get their money back.
Best Practices For Risk Management In Margin Trading
Now, that you’ve decided to step into crypto margin trading, here are some pro tips for you.
- Invest only as much as you can bear losing: In crypto trading, there are high risks of losses no matter how sure you are of yourself. This is why it is always wise to limit your investment to the amount you can stand losing.
- Don’t use High Leverages right away: Don’t let the emotions come in between when you are setting leverages. There’s no point of setting high leverages especially above 50X. Start low and learn slowly. Moreover, setting high leverage can get you out of the position very quickly and cause premature liquidation.
- Always Set Stop-Losses: while setting up your trade, make sure you set stop losses too. This would help you get out of the position if the market goes against your trade. Don’t set stop losses to close and also don’t set it too far also. Almost, all the exchanges that offer margin trading have this functionality. However, in some cases, the stop-loss position is selected by default and some give you the ability to set it manually.