What is margin trading?
If you want to buy cryptocurrency, you can easily do so at a broker. Brokers make sure that a lot of crypto coins are available to a wide audience. Once you have cryptocurrency in your possession, you can sell it again for euros as soon as the value of the coin rise. This is a fairly simple investment, but there are people who want to take it to the next level. If you really want to trade intensively, you’ll need to be on a cryptocurrency exchange. An exchange like Binance is probably the best-known one. On an exchange the price of a currency will determine the market price, a broker will determine the price itself. Because of this, you’ll be able to make more profit with good speculations. To increase the chance of making more profit, you can invest with leverage. This is called margin trading.
Margin trading is investing with a leverage
In case of margin trading, you can bet money on the rise or the fall of a price. For instance, when you think that the price of Bitcoin is going to rise considerably, you could open a position which speculates on this. This way, you’ll be able to make a profit on an exchange. You don’t actually buy or sell cryptocurrency.
When you trade with margin, you borrow money from other users when opening a position. This is done by using a leverage. When a leverage is 10x and you deposited 1 BTC, your position will be worth 10 BTC. Because of this, you’ll earn more money when the price is rising, but you’ll also lose more money when the price is going the other way. You’ll never lose more than you actually have, so you’ll never have a debt (to the exchange) with leverage trading.
When the price is rising, you’ll make a nice profit. Suppose that the price of Bitcoin rises with 10%. This means that your position with borrowed money of 10 BTC will also rise with 10%. That’s a nice profit, but don’t forget that you’ll only receive the percentage as a profit. So after your trade you’ll have a profit of 0.1 BTC. In case you opened a normal position without any leverages, you would have earned 0.01 BTC.
With margin trading you’re exposing yourself to a higher risk.
When you’re doing margin trading you’re taking bigger risks. Not only you’ll be able to lose money faster, but depending on your leverage can also get liquidated faster. If you are liquidated, you lose all your invested money, so this is something you want to avoid at all costs. The higher your leverage, the closer your liquidation price will be, i.e. the price when you will be liquidated. Good to know is that you can never lose more money than there is in your account. So, keep in mind that margin trading with a leverage can give you extra profit, but it could also mean that a price drop of 10% could mean a drop of 100% for you (with a 10x leverage).
Speculating with borrowed money still sounds a bit scary, that’s why it is good to know what’s going to happen with your borrowed money if you’re not making profit.
If we use the position in the example above, you’ll have a position which allows you to speculate on the price with 10 BTC. It is good to know that this position also contains 1 BTC of your own money. When the price is dropping and your 10 BTC is only worth 9 BTC, you’ll have to add 1 BTC to keep your position open. This is called a margin call.
If you don’t make a margin call or if you don’t make a margin call fast enough, your position will be closed and liquidated. This means that you will lose all your money (1 BTC). If you respond to the margin call in time, you can either straighten your losses or lose even more.
Where can I do margin trading?
The following trading platforms are known for their margin trading functionalities: