Is crypto margin trading a viable option? Cryptocurrency today needs no introduction. It has huge growth potential and offers a lot of opportunities to make money which is why enthusiasts from all over the world have shown their interest in it.
A lot of people are now engaged with crypto making the space all the more competitive.
If you want to step into this exciting world of crypto but do not have the necessary funds to invest or trade on a relatively large scale, you can always go for crypto margin trading.
This is the process that will allow you to borrow extra funds from the crypto exchanges and make larger trades.
If you do it efficiently and manage the inherent risks of it, you can surely enhance your profits for a fixed capital.
In addition to the benefit of borrowing money and trading, traders following this process can also take a long view of the crypto they are trading with and sell it short.
Therefore, crypto margin trading, in short, is quite a viable option.
Here is an article that will tell you everything that you need to know about crypto margin trading which will allow you to leverage your position.
It augments trading results but at the same time an unlucky trade may result in a complete loss.
Margin trading is usually followed mostly in a market that is less volatile like stock and forex markets but you can do it with crypto as well provided you know the ins and outs of it since it is a bit risky due to the high level of volatility in these markets.
Is Cryptocurrency Margin Trading a Viable Option?
Back in time, crypto investing and trading were available to a handful of people who had extra money that they could afford to lose.
Thanks to the growth in the popularity of crypto and the increase in interest in people to get involved with it, that is not the situation now.
Now, you can even invest in crypto and make large trades by borrowing money from a broker or a crypto exchange.
However, at this point, you should not confuse it with investing in crypto by taking on debt, though it sounds pretty much the same.
Crypto margin trading is an entirely different concept which needs a thorough understanding of the process, the risks, and the rewards in order to be successful in it.
Typically, trading on margin is a commonplace in all asset classes.
Several investors follow this industry-standard practice while trading stocks, buying gold, or while speculating on future contracts of oil.
This has been the practice followed for decades and therefore is nothing new at all.
Since crypto is considered to be an asset class where people invest in, this concept is also introduced in this field.
Though it is new, it is identical to the age-old practice. But, just because you can trade crypto on margin, it does not mean you should.
You should consider several other aspects and your condition before you jump into it so that margin trading turns out to be truly a viable option for you.
First, you should understand the amount you can borrow from the broker for margin trading.
You cannot borrow any amount you feel like.
This amount is actually a multiplier of your cash balance with the broker as well as the leverage margin offered by the broker.
For example, if you hold $5,000 in your brokerage account and the broker offers a 10-times margin, you can borrow $50,000 and use it to trade or invest.
This amount lent to you is not for free as well. It will be subject to different fees, and, of course, interest.
This is the revenue of the brokers and it has surely become quite a big source of income today.
The leverage offered by the broker can vary from one broker to another.
As such the crypto broker of Europe offers much more leverage than the American brokers.
Now, the question is, with all these factors involved in margin trading, is it worth taking such risks.
Well, margin trading is surely not your cup of tea if:
- You are inexperienced
- You do not want to do or have done a lot of research
- You do not have a definite purpose
- You do now want to work hard and
- You succumb easily to stress.
You must be knowledgeable about margin trading in the first place.
You must go through all the documents and research about the exchange before you start.
This will help you to know whether or not that exchange is reliable.
In addition to that, you must also understand:
- How to open your margin position
- How to close your margin position
- What is the margin ratio
- What are margin calls
- A few margin trading strategies and
- The technical indicators.
Since margin trading of crypto is risky, you must know them in the first place along with the margin ratios and then decide on the size of your bet.
If you start with Altcoins having high volatility but with low volume and use the leverage properly, you can make a lot of money quite quickly.
However, unlike regular crypto trading, in margin trading you might lose the entire amount of your initial investment regardless of the fact the value of the coin has not gone down to zero.
Moreover, the more leverage, the quicker you may lose your money.
Though you can prevent your trade from closing by adding to your position, it will put you in a rabbit hole and there is a high chance that you may ‘blow up’ your account.
And, if you consider longing or shorting your position, you will inevitably double the chances of getting the market wrong.
Therefore, if you really want to margin trade crypto you should know that:
- These trades come with time limits which mean that your trade will be settled automatically if it is not executed in time
- Shorting is risky in crypto margin trading but may act as a hedge and
- Speculating on the price of a crypto coin with leveraged positions without proper technical analysis can be a perfect recipe for disaster.
However, margin trading crypto can be beneficial when you keep less of them on the exchange at a time.
It will protect your crypto, if you have lots of them.
It is far less risky as compared to speculating on the price of the coins simply with leveraged positions.
Finally, apart from being cautious you should also be aware of the tax implications of margin trading before you jump in.
Since margin trading involves making gains and losses constantly in the short term, it is subject to short-term capital gains tax.
The tax implications involve:
- The rate of tax
- The need to report trades and
- The need to pay quarterlies.
On the other hand, you can avoid it if you hold on to your crypto simply.
If you hold for a long period of time, you may even get the benefits of long-term capital gains rates.
Therefore, there are lots of pros and cons to determine and be cautious in your move if you really want to make margin trading a viable option for you.
You will also need to be well aware of the market and the assets so that you can reduce the risks involved in it.
And, for that you will need to:
- Interpret different charts
- Recognize the trends and
- Determine the entry and exit points.
In addition to that, you will also need to have intense understanding and extensive knowledge about spot trading and technical analysis.
This will help you to anticipate the risks, though not eliminate it, and margin trade in a much better and more effective way.
Now you may wonder whether or not crypto margin trading is safe for you.
Well, it cannot be denied that there are specific risks involved in crypto margin trading.
Leveraged trading will surely amplify your chances of incurring losses but at the same time it will augment the chances of making profits as well.
This profit amount will be much more when the market moves in your favor but if the prices move in the opposite direction of your prediction, your chances of incurring larger losses will be enhanced.
You must keep in mind that every margin trader is required to hold a fixed percentage of the value of their position at all times on the exchange if they want to keep their positions open.
This is called the liquidation price.
If, in case, there is a loss incurred in a trade and that loss exceeds that specific amount held by the platform, the order will be closed automatically.
Therefore, margin trading is surely not a process to follow by the beginners in the crypto space.
Purpose and Usage
As said earlier, margin trading in crypto allows the traders to enhance their buying power much more than their current account balance by borrowing capital from the crypto exchange or the broker.
Simple as it may sound, it might be a bit overwhelming, especially in the beginning.
This process ideally solves two different purposes for the two parties involved in it, the trader and the crypto exchange or broker.
For example, the trader gets the desired capital and the exchange gains some profit in return by providing it to the trader.
This process involves two separate stages such as:
- The trader provides capital to the crypto exchange platform in some form and
- The exchange offers the trader capital in some other form and makes some profits along with it.
The trader actually makes the deposit in order to open a position.
This is called the initial margin. However, to maintain the position, the trader needs to keep a certain amount of capital in the account.
This capital deposited and retained with the lending platform or the crypto exchange is held as collateral by them.
The amount of leverage you can get for margin trading will typically depend on the rules for it that is usually designed and imposed by the concerned platform you wish to trade with.
It also depends on the amount of initial deposit made by you.
Terms to Know
Now, before you get into the core of margin trading, it will be better for you to know a few specific terms in this form of crypto trading.
Here they are:
- Collateral – This means the funds that you hold in your margin account which is a sort of a guarantee to the broker that you will be able to repay the loan.
- Margin call – This refers to the demand made by the broker for more funds in your margin account. If you fail to respond to these margin calls, the broker has the right to sell off your positions.
- Stop-limit order – This is actually a form of a conditional trade. You can set a stop, limit or start to the target price of your trade along with a timeframe as to when the particular trade will be executed or ‘filled’ when you want. Depending on your liking, the trade will be canceled when the price of the coin rises or falls.
- Stop-loss order – This is much similar to the above and is quite useful a tool for leveraged trading. You can fix the limit till that amount of loss you can take on. The asset will be sold off when the price falls to the extent of your preset loss limit.
- Trailing stop – This is a specific type of stop-loss order. In this you can lock in your profits. In this process you have to decide when exactly you want to exit a position with no emotions influencing your decision.
- Margin – This refers to the loan offered to you by the broker to place larger trades. This limit is measured as a percentage of the total order that you have to commit. You will need to pay the loan back with interest.
- Leverage – This refers to the difference between the order total and the margin amount. Leverage is typically expressed as a ratio such as 2:1.
There are a few basic things that you ought to keep in mind when you plan to get engaged with crypto margin trading.
Starting with the pros and cons, here are the most significant advantages of crypto margin trading:
- It has a fairly large profit potential
- You get to choose the leverage you are comfortable to use and
- You can start small without having to open positions with large amounts of deposits in your margin account.
As for the downsides of crypto margin trading, it includes:
- You can lose all your funds if the trade is not successful
- There is the risk of margin calls from the broker and
- You will have to pay the loan amount to the broker or dissipate everything you have.
However, if done properly, margin trading with crypto will offer great opportunities to make profits allowing you to short, speculate, hedge, and avoid holding the full balance on an exchange.
You can margin trade crypto by using futures products and sometimes exchanges also allow spot margin trading.
You will also need to focus on a few other vital criteria such as:
- The exchange you trade with, which should be reliable
- The requirements of the exchange, which can be often very stringent
- The fees charged by the exchange
- The rates for funding.
Ideally, knowing the basics will enhance the chances of your margin trades being successful.
Margin trading can be of two basic types as follows:
- Isolated Margin Trading – This is the form that will let you limit the risks of the trade. This can be done by limiting the amount of margin in every position. If the fund in your account reaches the liquidation price, it will be closed and you will lose the funds of that specific position only and not of all your trades.
- Cross Margin Trading – This process will allow you to share your total asset balance in your margin account over all the open positions. This will avert liquidation of a particular position since the others will help it in a losing situation.
Out of these, Cross Margin Trading is mostly followed by the professional investors and traders who want to hedge their existing positions.
Ideally, the working process of crypto margin trading involves two basic steps – leveraging and call prices or liquidation prices.
Leveraging is the first step of it. When you think that the odds of a trade are in your favor, you may even borrow funds to leverage your trade.
This is actually taking an additional risk for getting additional reward.
Call prices and liquidation is the next step of the working process of crypto margin trading.
This is the situation when you do not have enough funds and it falls below the MMR or the Maintenance Margin Requirement and your position is closed automatically.
This process is called ‘margin call,’ ‘liquidation,’ or ‘called in.’
In order to margin trade with crypto all you have to do is:
- Log in to your account
- Activate your margin trading account by depositing some funds and
- Apply for a loan using the deposited money as your collateral.
It is simple but it is after that you will need to be cautious with your moves in order to make the whole endeavor viable for you.
Spot versus Margin Trading
Your knowledge for crypto margin trading will be further comprehensive when you know about its difference with spot trading.
Crypto spot trading is typically the most basic form of crypto trading which is followed by most of the traders.
In this form of trading you actually buy and sell crypto coins directly and instantly on an exchange.
This form of crypto trading involves the active participants of the market.
A trade is completed as soon as there is a mutual agreement between the buyer and the seller.
The buyer gets the ownership and the seller loses it, both instantly.
Crypto spot trading can be done by the beginners as well using fiat currencies to enter a position.
Crypto margin trading ideally depends on the performance of the crypto assets speculated.
In this form of trade the initial step is to offer collateral by the trader or investor to the exchange, which is known as the margin.
Further funds can be borrowed from the broker on interest.
The rate of interest charged will depend on the demand form margin funds in the market at that particular time.
Ideally, crypto margin trading is suitable for the intermediate and more advanced market participants.
Assuming that you are okay with the cost that comes with the borrowed funds in terms of interest and fees and want to access leverage or margin, here are a few tips that will make your crypto margin trading endeavor a success.
Since you will be dealing with borrowed money, you should be wise and cautious while using it.
Do not take unnecessary risks with the money that is not yours and you are legally bound to repay.
Always shop around to find the best rates, trading options and features available and never start trading with the first exchange that you come across.
Since this is a competitive marketplace, you will surely find more competitive rates. Also, go with a reliable exchange only.
Do the math:
You should not only think about the profits but also know about the loss potential which can be significant over and above your initial investment amount.
Therefore, do that math to know how likely it is to be an unprofitable venture.
Use common sense:
If you feel that margin trading will be more stressful for you, use your common sense and stay away from all the temptations.
If you do not have enough experience and a fairly high risk tolerance, it is prudent not to indulge with such risky ventures.
If you are new, you should surely reconsider.
The important thing to ensure success in margin trading is to start small.
Only when you gain some experience, can you make larger trades.
Divide your position:
You should not go all at once, especially if you do not have enough trading skills.
Instead, you should divide your position in small parts and create a gradually increasing investment portfolio.
This will not only minimize the risk but will also average down the entry price of your position. The same applies when you take profits.
Use risk management tools:
You should use proper risk management tools and set up stop-loss levels, taking profit levels, and closing position levels precisely and decisively.
When you set clear rules and levels, it will also minimize the losses.
This is most important. Since margin trading lets you borrow money and make larger trades, it is easy to fall prey to greed.
You should strictly avoid it because there is a high chance that you may lose your entire amount in crypto margin trading.
Therefore, never invest more than you can afford to lose.
Remember, the brokers can and will use all possible advanced risk management tools and legal measures to liquidate a position to recover that they are legally entitled to if it reaches a loss equal to the cash deposit.
Therefore, do not borrow more and never take out a second loan.
Finally, here are a few crypto exchanges and platforms that you can use for crypto margin trading.
Remember there are also others out there and this article does not promote any of these platforms.
That is why you are requested to do your own research thoroughly before you make a final choice.
Here they are, in no particular order, along with a few notable features and drawbacks of each:
Binance Margin Trading – One of the Biggest
When it is crypto, it has to be Binance whether it is for simple buying and holding of Bitcoin or other crypto coins, spot trading or margin trading.
It is one of the biggest platforms you will find in the United States of America for crypto margin trading, and it is also one of the best platforms in terms of trading volume.
Some of the unique features of this platform are:
- Isolated Margin Trading
- Cross Margin Trading
- Margin level
- No fees for fund deposits
- Security protocol of the highest standard
- Maintenance margin
- Up to 10 times leverage based on a tier system for Isolated Margin Trading
- Up to 5 times and 3 times leverage in Cross Margin Trading for master accounts and regular accounts respectively
- 1:3 margin trading offer and
- All margin orders go in the spot market.
It is easy to get started on Binance which involves these following steps;
- Sign-up with them
- Complete the verification process
- Deposit the funds in your account
- Visit the account dashboard
- Click on margin
- Complete creating your margin account
- Transfer the funds to it and
- Click short or long in the margin tab.
- A bit overwhelming for the beginners in crypto space and
- Most traditional methods are not supported.
As said earlier, you do need to pay any fees to make a deposit but there are fees charged for withdrawal.
If you use BNB, their native token, the fees may be reduced by up to 25%.
BitYard Margin Trading – One of the Best
BitYard is based in Singapore and is ranked as one of the best Bitcoin platforms for margin trading in the market.
Offering their services in more than 150 countries all over the world with Isolated Margin Trading, this platform will help you to keep your whole fund safe even during liquidation.
Some of the unique features of this platform are:
- Isolated Margin Trading
- Competitive trading fee
- Easy to use and customizable interface
- Up to 125 time leverage in crypto margin trading
- Up to 200 times leverage in derivatives margin trading
- Leverage slider to adjust leverage and
- Operates with its own financial license in 4 countries.
In order to get started with BitYard margin trading all you have to do is:
- Create your account
- Complete the email verification
- Transfer funds to the BitYard wallet
- Click on the contract tab on the header and
- Visit crypto margin trading.
- The minimum trading amount is $5 and
- The OTC deposits are available only in select countries.
The platform will charge you a fixed fee for margin trading at the time you open your position.
This fee is the product of the margin, leverage, and 0.05%.
Kraken Margin Trading – More Complex Trading Strategies
Kraken is based in the United States and offers its margin trading services along with other ones over 175 countries all over the globe.
You can use more complex trading strategies on this platform in order to magnify your trades and profit margins.
Some of the useful features of this popular crypto exchange are:
- Its user and beginner friendly
- One of the safest crypto margin trading platforms in the United States of America
- Low fees charged on leveraged trades
- Open positions at low price and close positions at high price or go ‘long’ with or without margin and
- Open positions at a high price and close positions at a low price or go ‘short’ but essentially with margin.
It is also very easy to get started with crypto margin trading on this platform. All you have to do is:
- Create the account with them
- Deposit funds in the Kraken margin trading account
- Click on margin on the header
- Set up the leverage
- Place the order and
- Start trading.
- The verification process is pretty slow and
- It offers a minimum leverage of up to 2 times and a maximum leverage of up to 5 times only.
The platform charges two types of fees from the users.
There is an opening fee and a rollover fee on the margin orders of 0.02% each for nearly all the crypto assets.
However, you will have to pay the opening fee one time for each order but the rollover fee will be charged from you after every 4 hours.
BitMEX Margin Trading – Fast and Secure Platform
BitMEX is also one of the best crypto margin trading platforms you will find but it is based in Seychelles.
This platform is known to be pretty fast and secure which is one of its primary reasons for being favored by the crypto traders.
Apart from providing futures and swaps, some of the other notable features of this platform are:
- High leverage
- High liquidity
- Reasonable fees
- Anonymity support
- Isolated Margin Trading
- Cross Margin Trading
- Leverage offered up to 100 times on select BitMEX contracts
- Perpetual contracts do not posting the entire margin as collateral and
- No fees charged on deposits or on withdrawals made.
All you need to do to get started with margin trading crypto on this platform is:
- Create your account
- Deposit some funds
- Go to the ‘Trade’ tab
- Select the leverage
- Place the order and
- To close a position click on the red ‘market’ button or click on create the similar price sell order.
- The user interface is quite old school and
- There are a few reports of illegal activities on this exchange.
Though there are no fees charged by this platform for making deposits and withdrawals, there may be some fees charged in the case of Bitcoin depending on the load on the blockchain.
Poloniex Margin Trading – Tier Based Fee System
Poloniex is another good margin trading platform based in Seychelles.
This platform offers services like spot trading, lending, staking, and margin trading.
According to a survey by CoinMarketCap, this platform has a fairly high dollar volume value in the USA and was ranked 13th as of March 2021.
Some of the significant features of this platform are:
- No verification requirement
- High liquidity
- Chatbox feature
- Leverage up to100 times depending on the initial and maintenance margins and
- Tier-based fee system
The steps to follow in order to get started with crypto margin trading on this platform include:
- Visiting the exchange
- Creating an account
- Logging in
- Depositing some funds
- Visiting the futures tab
- Setting the leverage
- Placing an order and
- Opening a position.
- Interest rates for lending are quite high and
- It was hacked in 2014 which resulted in a loss of 12% of the assets of the users.
The tier-based fee system of this platform allows you to apply for gold and silver tier.
Crypto margin trading offers a lot of benefits in terms of security and profits. However, it is not for the beginners since there are risks and a lot to know about it, as pointed out in this article.
A lot of research is needed to ensure it suits your needs the best.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.