- Margin trading is a method to leverage profits in a volatile market.
- This method allows users to borrow money from a broker and trade a coin in a position.
- Margin also allows for trading exotic pairs and multi-assets collateral.
Cryptocurrency provides traders with a wide variety of profit-earning methods both when the market spikes and falls. With different trading tricks, such as futures trading, leverage trading, long/short position, etc, the crypto realm opens more doors for traders.
Margin trading is also one such kind of trading method practiced by crypto enthusiasts for earning profit while the market becomes volatile.
This article explains margin trading, its significance, pros and cons, and the working process.
Margin Trading in Crypto
In simple words, crypto margin trading is a method of utilizing funds provided by a third party to transact assets. This trading method includes accounts that enable traders to obtain more funds and support them using different positions. That said, margin trading accounts are different from regular trading accounts.
Specifically, margin trading increases trading results by giving more capital to traders. This is why margin trading is mostly applicable to low-volatile markets and is practiced in forex, stock, and commodity markets too.
To elaborate, a trader can borrow funds from any margin-providing crypto exchange or broker. This borrowed money is used to buy cryptocurrencies. When the market price of the coin increases, the trader can sell the coin at this point and get more profit from the sale. Once the trader gives back the borrowed money and interest to exchange, the remaining money they hold will be the potential profit earned from selling the coin. Here, the market uptrend is the most relevant factor for earning profits in margin trading.
Likewise, traders can also earn a profit when the market is in a downtrend. When the price of a coin dips, the trader can borrow the coin from an exchange. Once the coin’s price increases, the trader can earn more money by selling the coin in the market. To note, the margin trader must always have collateral before borrowing money from brokers.
In traditional markets, investment brokers usually provide funds for borrowing, but in crypto trading, funds are often provided by traders, apart from exchanges. These traders, however, earn capital from interest based on market demand for margin funds.
In margin trading, a trader is required to commit a specific percentage of the total value ordered for borrowing. This initial investment is termed ‘margin.’ This is closely related to leverage trading because accounts in margin trading are also used to create leverage trading. Also, the leverage gives the ratio of borrowed funds to the margin.
To simplify, a trader borrows money from their broker and funds a crypto trading position. The broker needs small collateral for the loan, which may be as low as 1% of the position size in a 100:1 leverage ratio.
Traders can use margin by establishing either short or long positions and earn a profit when the market moves in favor of a trader. Also, in margin trading, there are some fees for opening a position and interest applied for borrowing coins.
Why Margin Trading is Important?
First of all, margin trading gives access to exotic trading pairs that involve two paired cryptocurrencies. With this pair of coins, traders can speculate on its relative performance, instead of trading the coins.
Secondly, traders can invest multiple assets as collateral to borrow leverage. This happens when an investor stores both fiat and cryptocurrencies as margin collateral. This method enables traders to use their assets with more flexibility and decreases the risk of selling coins in a volatile market.
Lastly, in margin trading, the users can earn benefits from arbitrage opportunities when the funding rate on futures pairs is volatile. In other words, traders can get control of a large sum of money in margin trading, which will increase the profit, even on minor price movements.
Benefits of Margin Trading
As mentioned, margin trading gives the potential for large profits within a short period and allows traders to establish bigger positions with less capital. More so, this method provides traders with a way to make a successful trade even during small market fluctuations. Margin also enables traders to store fewer cryptocurrencies on an exchange.
However, along with the benefits, margin trading also poses some disadvantages — this trading can be sometimes extremely risky and any surge in the market volatility will be even more difficult. Although a market uptick can bring profits to margin traders, it can create a big loss, if the market does down unexpectedly. Therefore, margin trading requires perfect timing, which cannot always be determined.
Exchanges Providing Margin Trading
Following are the exchanges that provide leverage for margin trading:
To conclude, margin trading has become one of the better options for earning profit in cryptocurrency trading. This trading method leverages profits when a trader borrows money for trading crypto in a specific position. If the market trends in favor of the trader, they can earn more potential profit. Sometimes, margin training may be risky, as a trader’s market expectation goes wrong. To avoid such situations, a margin trader must always research the market trends and possibilities, before they step into any trading.