What is crypto margin trading? It’s a great question. To answer this we must look at one of the most booming parts of the crypto market – trading. No matter the market, whether it’s bear or bull, people love to trade. People love to make money. It’s not easy to make money by trading cryptos, but then again making money is never easy. It requires hard work. For people, who don’t start with large cash positions, margin trading allows the trading with leverage so profit is magnified. This blog post will take you through everything you need to know about crypto margin trading.
So what exactly is margin trading?
Margin trading allows a trader to open a position with leverage.
Margin trading allows users to trade with money they don’t own by leveraging their position with borrowed money. For example, if we had an open position at 2X leverage with $100 of your own money, we would also trade with another $100 from a “lender” off the platform totalling $200
In some exchanges, like Poloniex, users provide the loans for the margin markets. In others, the exchange provides them. For example, in the Poloniex exchange, anyone can lend their cryptocurrencies earn from interest on the loan.
The risk and reward of crypto margin trading
It’s important to note there’s a cost when entering a margin position such as paying the interest for the borrowed coins and fees for opening a position
The higher the leverage you take the more money you can make. Your gains are magnified. At the same time, losses are magnified too.
The maximum that can be lost is the amount you invested in opening the position.
This level is called the liquidation value. The liquidation value is the value where the exchange automatically closes the position, so none of the money loaned is lost.
So we can lose 100% of the initial starting capital, but we can make 1000s % profit. The amount we can make isn’t capped.
This is why margin trading is hugely exciting.
Short and long positions
In cryptocurrency trading, most people know how to go ‘long’. When a cryptocurrency drops, you buy. It goes up 20% on $100, you now have $120.
A short position is the opposite. If you think that a particular cryptocurrency is about to drop, you could open up a leveraged ‘short position’. You lend additional cryptocurrency so you can buy it back at a later, cheaper rate.
In other words, if you open up a 2X short position with $100, and it went down 50%, you would earn $100, thus coming out of the trade with $200. If the trade went up 50% then you would have lost $100 in the exchange which would automatically close out your position.
Here’s a handy example from Kraken who offer margin trading:
Suppose you fund an account with $5,000 and open a $10,000 short position in XBT/USD using 5:1 leverage. Your margin is one-fifth of the amount borrowed for the position, or $2,000. The margin level when you open the position is ($5,000 ÷ $2,000)×100 = 250%. If your position has an unrealized loss of $3,500, your equity would be $5,000 – $3,500 = $1,500. Your margin level would then be ($1,500 ÷ $2,000)×100 = 75%. At this level, you are in danger of getting liquidated. As you can see from this example, it’s possible to open a position twice as large as your account balance and still be able to endure a sizable loss before margin call. Your own risk management on this trade should have you closing your position well before margin call, but it’s good to understand what the limits are.
Let’s see what happens in the example above if 2:1 leverage is used instead of 5:1. With 2:1 leverage the margin for the position is $5,000. So as soon as the position is opened the margin level is 100%. The system might let you open this position (though it wouldn’t let you open a position where your margin level starts below 100%), but it wouldn’t be a good idea to open a position where your margin level starts so low because you are already close to being liquidated. An unrealized loss on the position of $1,250 would bring your margin level to 75% where you are in danger of being liquidated (check this yourself). More leverage should be used so the margin level starts higher, and a stop should be set on the position so that the position is closed well before there is any danger of margin call.
Quick tips to crypto margin trade like a boss
Start with a practice account
This couldn’t be recommended enough. Learn in a simulated environment and make mistakes at no risk to your capital. Once you feel confident using the platform and executing trades, then progress onto a real account. Even then, start small and build your confidence and trading knowledge.
When trading on margin, it’s key to set clear rules. It’s easy to get swept along when profits roll in. Beware of excessive greed. Trade smart.
Consider the amount of money you can lose without having a detrimental impact on your life.
Set clear levels for closing positions. A stop loss will protect you from losing all your funds. A closing position will help you bank profit. Profit isn’t profit till it’s banked.
Volatility in cryptocurrency currency trading is inherent to the marketplace. The margin trading of cryptocurrencies increases the risk. Therefore, try to make short-term trading leveraged positions.
Use stop losses
In the event that a trade does work out, then you need to a stop losses in place. Some exchanges have automatic stop losses and some do not. Make sure you use this wisely.
Invest only what you can afford
Always have a defined amount of funds that you’d like to stake on a platform, a trading strategy or a trade. Never chase losses. Never let your emotions get in the way of your margin trading. Be emotionally cold and play the numbers.
Exchanges that offer crypto margin trading
There are many exchanges that offer crypto margin trading and the secret is finding one that works for you.
Options include: BitMEX, Kraken, Deribit, Hubobri Pro, Poloniex. If you’d like to read an unbiased review of the best cryptocurrency exchanges for traders, click here. This will take you to one of my most popular pages.
The above exchanges are great places to start for crypto to crypto margin trading.
Coming from a Forex and indices trading background, I also use LH Crypto which is a bit different. It’s one of the few platforms that offers a cross market platform (Forex, precious metals, shares, indexes, commodities and cryptocurrencies).
At last count, the LH-Crypto trading platform supports more than 200 different types of instruments.
All the settlements with traders are done in cryptocurrencies (BTC, ETH, LTC ect).
As a Forex trader, I’m used to using Meta Trader 4 which if you haven’t come across is an industry leading trading platform.
LH crypto uses Meta Trader 5 which is razor sharp for desk top crypto margin trading. It’s a good place to hone your skills o be a savvy part-time trader, or even a full-time one.
Crypto margin trading – top tip revisited -start with a practice account.
I really like LH Crypto as it has a free practice account using the Meta Trader 5 software. On here, you can trade in a virtual environment at zero risk. Trade here for 1 month, or even 1 year. Take your time and hone your skills.
*** TOP TIP – crypto instruments are the most volatile. Forex instruments are the least volatile. Shares, precious metals and commodities are somewhere in between. For a beginner level, we would recommend instruments offer the lowest risks – Forex and precious metals.***
If you are a seasoned trader, then you can skip this step and move onto crypto marking trading across different market sectors.
Whether you are a newbie or seasoned, there’s also trader incentivised competitions which you can take part in. Who said Lambos were dead in crypto?
If you want to give LH Crypto a go sign up here. I get a small affiliate percentage on trades you make and this helps keep the lights on a cryptocoindude.com. So I wish you the best of luck in your trading journey.
What is crypto margin trading – wrapped up
Cryptocurrency margin trading is a great way for you to make significant returns on funds if you’re not starting with a significant cash pile.
As long as you have a trading strategy and have practiced thoroughly, then you have a good shot at making profit from crypto margin trading.
You should always Do Your Own Research (DYOR). This is especially true for a highly leveraged crypto margin products. Know your appetite for risk, know your knowledge and make an informed choice. If you liked this post please share on your favourite social media channel.