For exchanges with a few crypto-currencies, i.e. altcoins and bitcoins, there is the choice of margin trading in to add leverage to your investment. This, in fact, grows the amount invested without having to really hold the assets. It is important to mention that margin trading is not advisable for everyone and it has a very high risk.
LET’S START: WHAT IS MARGIN TRADING?
Margin trading lets a trader open a position with leverage. For example – we opened a margin position with 2 times leverage. Our base assets had grown by 10%. Our position generated 20% because of the 2 times leverage. Standard trades are exchanged with leverage of 1:1.
Margin trading is not impossible due to the existence of the lending market. Lenders offer loans to traders so they can invest in higher amounts of coins, and lenders benefit from interest on the loans. In some trades, like Poloniex, users produce the loans for the margin markets and in others the exchange itself produces them. Like for example, in the Poloniex exchange, everyone can lend their bitcoins or altcoins and benefit as well from interest on the loan. The main disadvantage is that the coins required to be in the exchange’s wallet, which is a lot less safety than a cold wallet.
COSTS AND RISKS OF MARGIN TRADING
As said above, the cost of the margin position incorporates paying the interest for the borrowed coins (whether to other users or to the exchange), and fees for opening a position with the exchange.
As the chance to earn more grows, so does the risk to lose more. The supreme we can lose is the amount we had invested in order to open the position. This level is what we called the liquidation value. The liquidation value is the value where the trade would systematically close our position so we won’t lose any of the loaned money, and only lose our personal money.
Example: if we are talking regarding standard trading, leverage 1:1, the liquidation value is when the position attains a value of zero. When the leverage escalates, liquidation worth will get near to our buying price. For example, Bitcoin value is $1,000, we purchased one Bitcoin (long) with leverage of 2:1. The price of our position is about 1000 USD, in addition, we borrowed 1000 more USD. The liquidation worth of our position will be a slight over 500 USD – because at that level we lose approximately our initial 1000 USD plus interest and fees.
Also, margin trading can be against the market, we can also short position with leverage.
MARGIN TRADING TIPS
Risk Management – When trading on margin it is significant that there are transparent rules of risk management, be careful of excessive greed. Take into account the amount you are willing to risk, keeping in mind it can be lost totally. Set transparent levels for closing positions, taking profit or a stop loss.
Watch closely – Crypto coins are deemed assets with excessive volatility. Margin trading of crypto currencies duplicates the risk. Therefore try to create short-term trading leveraged positions. Moreover, although the everyday fees or margin position is negligible, in the long term the fees can amount to an important sum.
Extreme movements – Crypto trading occasionally has supreme fluctuations that appear in both directions (“Deep”). The risk, in this case, is that the deep will reach our liquidation value. It could happen where the leverage is relatively high so the liquidation value is relatively near. In fact, you can take advantage of these deeps and aim to set closing target positions, hoping the deep will run over them, giving you with a decent profit and then going back to the past price.
EXCHANGES WHICH ENABLE MARGIN TRADING
It is now conceivable to exchange margin on most exchanges. The advantages of leveraged trading are very obvious and another significant advantage is the security aspect. Crypto traders should venture to minimize the amount of coins they keep on exchanges. Exchanges are deemed hot targets for hackers and in recent years there have been a number hackings of exchanges, the last crucial break was the Bitfinix hack in 2016 when a third of the exchange’s Bitcoins were stolen.
Trading on margin lets us open grown positions with no required to provide the Bitcoin needed, that way we can have fewer coins on the exchange account. Like for example, if our portfolio contains five Bitcoin and we need to hedge against the risk of Bitcoin’s decline, 10 times leveraged short position could be open and it will be equivalent to 40% of our Bitcoin portfolio. To open the position the amount needed is only a tenth of it (10 times leverage). That means that we really need to only have 0.2 Bitcoin. So our Bitcoins are kept safely in cold wallets.
Bitmex – is a relatively new exchange. It has obtained an excellent reputation in a short time and a lot of traders use it frequently. Dominating the margin trading, the exchange offers up to 100 times leverage margin trading, both short and long. It is very simple to operate and has great support. With this link, you can get a discount on the fees.
Bitfinix – This exchange coordinates the biggest trading volume of Bitcoin USD market, with margin trading up to a leverage of 3.3 times. The interface is truly user-friendly and it is simple to carry out transactions.
Poloniex – the biggest crypto exchange. Leveraged trading of 11 Altcoins, there is no BTC USD margin trading. Leverage is obtainable only at 2.5 times. Relatively high-interest fees when shorting.