- By Pierre-Alexandre
July 12th, 2019
Some crypto exchanges offer margin trading features to investors. Binance has announced this week that margin trading was now available on their exchange. According to Binance official website, having launched the Margin Trading platform, they are willing "to push the industry forward and toward the freedom of money, expanding its trading offerings."
What is Margin Trading?
Margin Trading is leveraging the existing positions by borrowing funds to provide higher potential profits. However, this also comes with a higher risk, as the crypto market could be very volatile.
Here is an infographic about Margin Trading:
Looking at the increased investor participation in the crypto market, a number of cryptocurrency exchanges have started offering ‘Margin Trading’ facilities to its customers. Margin Trading basically involves leveraging the existing positions by borrowing funds to maximize your profits.
For investors and traders who have been trading in stocks over a long time, the term ‘Margin Trading’ is not at all new to them. The concepts of Margin Trading which apply to the traditional stock markets are also applicable to the cryptocurrency market.
Understanding Margin Trading Concepts
Margin Trading means opening a position with leverage in order to increase your buying power. It thus allows crypto investors to purchase digital assets worth more than the sum of coins or tokens they actually have.
Suppose that you plan to invest $100 and borrow another $300 to invest a total of $400 in BTC. It means that you have leveraged your position 4:1 with your initial cash deposit only at $100 to purchase additional digital tokens on margin.
On the other hand, the lender which provides you the cash leverage will benefit from earning interest on the loans. Margin Trading looks quite lucrative provided the investor/trader makes smart choices and the markets favour your positions. But it can also go wrong.
Hence once must make proper risk assessments before opening up margin positions. If the chance of earning profits by leveraging your margins increases on one side, the risks of losing more increases simultaneously.
If your trade goes opposite to your initial considerations, you will have to bear loses by ‘x’ times your leveraged position. Thus, no matter what, you will have to pay the lender $300 plus the interest over it.
Crypto Exchanges Offering Margin Trading
There are a number of cryptocurrency exchange which provides margin trading facility. Some of them include BitMex, Poloniex, eToro, Bitfinex, Kraken, and now Binance. Each of these exchanges has its own rules and limits to allow its users to leverage their positions.
To protect the lender’s money, many exchanges have the maximum leveraging cap. The exchanges also provide maintenance margin to ensure that the value of digital tokens in the margin account doesn't fall below certain levels.
In the above example, if the price of BTC goes up, you can keep your positions open till the time you like. This is because you’re already incurring profits and there is no risk of losing lender’s money. But if the BTC price goes down, you need to liquidate your position depending on your leverage rate.
Thus, it is very important that you know all the tricks of the trade before you opt for margin trading. Below are some of the pros and cons of using Margin Trading.
Advantages and Disadvantages of Margin Trading
The benefits of Margin Trading.
- Margin Trading gives investors the flexibility to time market opportunities even with little cash available.
- Your profit margin increases exponentially by leveraging through margin trading, then you could earn just by putting your cash.
- Margin Trading allows for diversification across assets with limited available capital.
The disadvantages of Margin Trading.
- Considering the high volatility of the crypto market, margin trading can also maximize your losses if the trade goes wrong.
- It can dearly cost you if the trade goes opposite. Besides losses, you also end up paying the lender the borrowed sum as well as a heavy interest on it.
Note that Margin Trading is extremely subjected to risks and volatility. It is a complex product, and you should use it with vigilance and caution. Though all exchanges providing Margin Trading are doing their best to secure your funds and gains, nobody will be responsible for your losses. So, look before you leap!