What is Crypto Margin Trading and how it works

crypto margin trading

September 8, 2020

Reading Time: 3 minutes

Are you an enthusiastic crypto trader? willing to open a trade that you see being potential but you got limited capital. It’s at this juncture that you should take advantage of the crypto margin trading, just like most veteran crypto traders do. But wait, are you new to this concept? If Yes, worry no more, Here at MyCryptoParadise it’s our due duty to educate crypto newbies on such trading concepts and today we chose to train on how you can use leverage trade and crypto margin trading as a tool to increase your buying power.

What is crypto margin trading?

It’s the ability to use the borrowed fund to trade cryptocurrencies on an exchange platform. A concept popularly referred to as crypto margin trading or trading with leverage. Though there is a slight difference between the two terms, they can be used interchangeably in many instances. So how does trading with leverage differ from the latter?

what is crypto margin trading

Trading with leverage refers to the ratio upon which a trader’s initial capital is increased to arrive at the amount to trade with. For instance, if you as a trader has $500 and the trading leverage allowed is 100x (100:1), it implies that your amount will be increased five times and subsequently your buying power increases to $50,000.

How does trading margin works?

Having understood how leverage trading works, then crypto trading margin shouldn’t be difficult, to enter a crypto trading margin it will require you as a trader to commit a percentage of your total order value to a trading exchange to serve as initial capital. The initial investment (margin) is then multiplied by the leverage ratio find the amount to trade with at a particular duration.

In most cases, trading rules and leverage rates differ from one exchange platform to another. For instance, a 2x is a typical leverage ratio in stock with the exception of futures contracts that can be traded up to 15x. For the Forex brokerages, the leverage ratio ranges between 50x to 200x whereas in cryptocurrencies the market ratios are normally set between 2:1 to 100:1.

Key aspects of Crypto Margin Trading

Going long verses going short: As a crypto margin trader, you can make a decision on either going long or short for a particular trading session. Going long implies that you will be anticipating an increase in cryptocurrency price whereas going short implies anticipation of a price decrease. Thus, when you chose to enter a long position and the prediction goes as you anticipated, then you stand at a chance to gain as per the leverage of the margin. Conversely, you should opt for going short when you aim to profit from crashing prices.

Margin Call: is collateral provided by the trader to minimize loses when the trade is going against the predicted move. Since, the crypto market is volatile and difficult to have an accurate prediction all the time, a margin call is there to shield one from extreme loses because the leveraged amount is liquidated when it exceeds the maximum loss allowable and only the margin is used at such instance.

Liquidation: a process of liquidating margin trade at a point when a trader loses more money than his initial investment. This implies that the trading position automatically close and the trader loses all his capital. A typical example will be when a trade has a margin of $500 and leverages it by 100x to acquire $50,000 worth of bitcoin. This implies that once bitcoin price goes down by $5 that trade will lose ($5×100) a point which liquidation takes places and the trade comes to a standstill.

Final Thought

It’s of no doubt that margin trading has a greater advantage to crypto traders with limited capital but would like to amplify their profits upon successful trades. Margin trade best suits traders that would like to have more buying power provided by margin accounts as a way to increase both portfolio diversification and profitability. On the same note, margin trade can equally amplify loses due to volatility nature of cryptocurrency thus its recommendable to use the best trading signals as mean to always predict right and win your trades.

3 Comments

  1. Thompson

    Ok so I have a question: could I relate the Margin call to stop loss and take Profit? I’m glad I had read the article on how to avoid losses before now. I have a better understanding on how important it is to get Crypto signals as a newbie.

    Reply
  2. Matt Sweeny

    I certainly am not a seasoned crypto trader but this leveraged trading info is valuable and I’m glad I found this educational crypto trading signals article to learn more now. Thank you.

    Reply
  3. Meg Cabb

    Is it just me or somehow, I got more confused after reading this. A simpler version???

    Reply

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