What is Margin Trading Crypto? A Beginner’s Guide [2021]

Sep 15, 2020
margin trading, crypto trading, crypto traders, bitcoin trading

Margin trading crypto is a very popular segment of the crypto market. Bitcoin margin trading alone was worth $100 billion in 2019. It is especially impressive because the same Bitcoin margin trading was worth a meager $10 million in 2014. The growth from $10 million in 2014 to $100 billion in 2019 is an incredible rise. It proves that the crypto enthusiasts and traders have readily adopted margin trading crypto. There's no stopping it now. 

How does it benefit crypto traders? The crypto market is very volatile. Hence, there are continuous price fluctuations among the crypto markets. It’s not bad per se for the crypto traders. They can make a profit regardless of whether the current market is a bear or bull one. In other words, crypto margin trading works for both types of markets.

So, what is crypto margin trading? This article further explores:

  1. How does crypto margin trading work?
  2. What’s the difference between short and long margin trades?
  3. What's the relationship between a margin call and liquidation?
  4. What are the benefits and risks of margin trading?
  5. How to choose an exchange for crypto margin trading?
  6. Should you start with margin trading crypto?

What is Margin Trading Crypto?

You must have been bombarded with many big words when you were looking to understand Bitcoin margin trading. The truth is that margin trading crypto is a straightforward concept if we remove all the clutter. 

Margin crypto trading provides traders with access to more capital. Thus, crypto traders now have more buying power. Margin trading crypto makes their buying power larger than what their actual account balance shows. Hence, the traders can open far larger positions which they wouldn't have been able to without the margin trading option. For example, with $100 and a leverage of 1:5, a trader can open up a trade worth of $500 due to this leverage of 5.

Are you wondering where do crypto traders borrow the extra capital from? In margin trading crypto, crypto traders borrow additional capital from the exchange itself. Sometimes, the crypto traders even borrow additional funds from their peer traders on the exchange.

But what about leverage, what does it exactly mean? Margin trading is also popularly known as "leverage trading." It refers to a multiplying factor increasing the trading capital of a crypto trader. As seen in the example above, a crypto trader who is trading with a 50X leverage will now trade with 50 times the capital they hold in their account. 

Isn't margin trading just perfect? It can help you multiply your profits quickly with minimum capital requirements. So, how does margin trading actually work?

How does Margin Crypto Trading Works?

There may be minute differences in the rules regarding margin crypto trading across different trading platforms. Yet, the core concept of margin crypto trading remains the same across all platforms. 

The margin trade begins with the trader committing a part of their total order value. This amount that the trader commits is known as the margin. Conceptually, margin resembles leverage. A crypto trader creates leveraged trading through margin trading accounts. 

There is a difference between the ratio of leverage in the crypto market when compared to that in the stock market, futures contracts, and forex brokerages. The typical ratio of leverage available in the stock market is 2:1, and in future contracts, the typical ratio is 15:1. In the forex market, the common leverage ratio is 50:1. The leverage ratio of 100:1 and 200:1 are also not uncommon in the forex market. In the crypto market, the typical leverage ratio is in the range of 2:1 to 100:1. 

In crypto margin trading, the trader's crypto assets work as collateral. Based on their crypto assets, the traders borrow capital in margin trading. The traders must understand that the margin trading crypto exchange can also initiate the sale of the assets. They may do it when the price of an asset goes above or below a pre-decided threshold.

What's the Difference Between Short and Long Margin Trades?

A trader can engage in both long and short positions in margin trading. In long positions, the trader assumes that the price of an asset will increase. The short term position means its opposite. In the short term position, the trader assumes that the price of an asset will go down. 

What's the Relationship Between the Margin Call and Liquidation?

In margin trading, a trader borrows capital from the exchange to open larger positions. To minimize the risks, the exchange has set some protocols. You will have to provide additional collateral if the market moves against you. If you don't do so, the exchange has the right to forcibly close your position. The level at which the exchange is compelled to liquidate your digital assets is known as “margin call level”. 

When the price of your asset goes below a specific threshold, your crypto exchange will hit you with a margin call. Most of the exchanges send an email to notify the traders regarding a margin call. But, almost no crypto exchanges guarantee advanced notification will be delivered on time. Hence, the traders must regularly monitor their margin level. 

There is also a term known as "Margin Liquidation." In margin liquidation, the exchange liquidates an open position. It happens when the margin level becomes too insecure. This level is also known as the liquidation price or the margin liquidation level. The exchange initiates liquidation to ensure that the loss is only of the capital deposited by the trader. Hence, the loss is limited to the amount of capital that the trader used to open a position.

What are the Benefits of Crypto Margin Trading?

Margin trading crypto exchanges are becoming very popular today. Yet, a crypto trader must keep in mind that it has its share of benefits and risks. The foremost benefit of crypto margin trading is the ability to make a substantial amount of profits. It also benefits the traders through diversification of their trading positions. 

The traders also learn how to remain disciplined while trading. Margin trading offers immediate access to trading capital for the crypto trading community.

What are the Risks of Crypto Margin Trading?

We cannot deny that margin trading crypto has a fair share of risks too. You must also factor in losses as the losses are also magnified. But the losses won't be proportionate to the leverage. You won't lose more than your committed trading capital. Yet, the losses are significantly higher. It is more than what you would have lost if you didn't engage in crypto margin trading.

Furthermore, a crypto trader has to pay the additional cost of ongoing interest on the coins they borrow. It is in addition to the fees that the exchanges charge from the traders to open a position. Therefore, make sure you have sufficient equity to cover fees for open positions.

How to Choose an Exchange for Crypto Margin Trading?

Now, let's explore how you can choose an exchange if you have decided to engage in crypto margin trading. The exchanges have varying criteria for deciding the eligibility for margin trading options. It’s most important to evaluate the yearly interest or rollover fees for margin trading.

All leading crypto exchanges such as Binance, Kraken, etc, have different criteria and features. For example, Binance charges a 10.03% yearly interest rate as a margin fee on BTC. Their margin trading yearly interest rates are as high as 31.02% depending on the cryptocurrency. You could shop around on other exchanges looking for the best margin trading fees and doing all the trading manually, but another great option is doing it right here on YouHodler with our automated solution.

With the Multi HODL tool, you can combine the best of margin trading and CFD trading into one, easy to use tool. Multi HODL comes with great features such as:

- Real market execution
- Free leverage usage
- Free rollover (swaps)
- Multiplying funds without physically buying crypto
- Easy editing on open deals
- The ability to earn interest on funds simultaneously while you trade with them
- and more!

Check out all the great ways to margin trade with Multi HODL today.

Should you Start Margin Trading Crypto?

There's no doubt that margin crypto is very attractive to crypto traders. Many margin trading crypto exchanges also offer interesting offers to the traders to start margin trading. The crypto traders can increase their profits immensely through margin trading. It also helps them diversify their trading positions. 

Yet, the crypto traders must not forget that margin trading crypto can also prove to be risky. With a chance of more profits, the risk of losses also magnifies. The margin trading crypto exchanges also charge many types of fees and interest rates from the traders. 

Margin trading offers a great opportunity for experienced crypto traders. Yet, we suggest that the crypto traders must conduct extensive research before they begin margin trading crypto. Decide which crypto exchange is best for you. Weigh the crypto exchange in terms of pros and cons. Go with the one that you think is best for you. 

Currently, YouHodler allows its users to lend money on its platform. The users can adopt the Barbell strategy to ensure that their trading strategy is safe. The Barbell strategy mixes the benefits of high-risk margin trading with safe, stable, and profitable investments. 

→ Learn more about the Barbell strategy.

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