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With cryptocurrencies attracting thousands of mainstream investors, Margin trading has become more popular in the crypto space. In this guide, traders can learn about the basics of margin trading and how they can do margin trading on cryptocurrency exchanges.
What is Margin Trading Crypto?
Margin trading is an advanced trading strategy that allows you to trade with more funds than you actually own. Traders can borrow money directly from a broker (crypto exchanges) and can trade assets with more funds than they have in their exchange wallets.
The funds you can borrow range between 2x and 125x of your investment, and the limit varies depending on the exchange you are using. The borrowing amount is referred to as leverage, and the higher the leverage, the riskier the trade.
To enter a trade, you first have to put some funds into your margin account on which you will be able to borrow leverage. The investment amount also acts as collateral for the trade, and if the price of the asset drops below a certain value, you can end up losing your entire investment.
For example, if you are borrowing 10x leverage for Bitcoin, you can enjoy a profit of 50% if the price of Bitcoin goes up by 5%. This sounds great because if the price of BTC goes up by 10%, you will end up doubling your initial investment.
However, higher rewards mean higher risks! If the price of Bitcoin falls 5%, you will end up losing 50% of your original investment, and if the price falls 10%, you will end up losing all your funds. That is why margin trading is only recommended for traders that are well-versed with the cryptocurrency markets and are good at predicting the prices.
What Cryptocurrencies to Choose for Margin Trading?
The cryptocurrency market is highly volatile, and some of the cryptocurrencies are more unpredictable than others. Margin trading is only suitable for cryptocurrencies that have higher market caps and are more stable.
The crypto space has seen currencies making 70% moves on either side within a day. So it is always smart to go for crypto that is usually stable and has a more predictable price pattern than other cryptocurrencies.
Margin Trading Positions
When it comes to margin trading, you can open two kinds of positions on the market:
- The Long Position
- The Short Position
What is a Long Position in Margin Trading?
When a trader speculates that the price of a certain cryptocurrency will go up in the coming future, they can open a long position for that cryptocurrency. Longing a cryptocurrency is equal to betting in favor of the price.
For example, if you have longed for Ethereum with a 20x leverage and its price goes up 5%, you end up making 100% profits on your investment. You can choose to close your position once your profit goal is met.
What is a Short Position in Margin Trading?
The short position is the exact opposite of the Long position as you are suspecting the price of the cryptocurrency to go down in the coming future. In this scenario, you are betting against the price by selling a cryptocurrency you do not own at a high price and buying it back when the price falls.
For example, If you are short-selling Ethereum with a 20x leverage, then you will be able to double your investment if the price of Ethereum falls 5%. However, if the asset price goes up by 5%, you will lose your entire investment.
Important Terms Related to Margin Trading
There are a lot of terms and jargon that you will come across while doing margin trading, so it is vital that you get familiar with them beforehand. Some of the terms you need to learn about includes:
Margin refers to the total amount that the trader has to put up for the trade. How much money you can borrow depends entirely on the margin you are adding.
Leverage is basically the number of assets you are borrowing from the exchange. You can choose leverage that is as low as 2x, or you can go as high as 125x. The amount of leverage you can borrow depends on several factors, including the margin amount, exchange policy, and the cryptocurrency you are trading.
A margin call is when the exchange wants you to add more margin to your position to keep it open. If you fail to meet the requirement, they can just close your position to cover the difference at any time.
Collateral is basically the total margin amount that you have dedicated to single or multiple positions. It gives exchange the guarantee that you will be able to pay off your debt in case the trade goes in the opposite direction.
Stop-limit allows you to open a new position when the price of the assets goes above or below a certain value. It also allows you to set a time period in which you want the trade to be open. By filling a stop-limit order, you can make sure you are entering the trade at the right time.
A stop-loss order is much like a stop-limit order, but it allows you to close your position when the value of the asset price has hit a certain price. Stop-loss orders are used to make sure that you are not taking any more losses than you can afford. You can set a value in your stop-loss order, and when the price of the assets falls below that percentage, your trade will be closed automatically.
Take-profit is similar to a stop-loss order. The only difference is that take profit is triggered when you are in profit, and the asset price has reached the target you were aiming for. You have to set the TP value manually once you have opened the position.
Whenever you open a trade, a liquidation price is calculated by your broker (exchange) with respect to your margin and leverage. For long positions, if the price of the asset drops to the liquidation price, you will lose all your funds as your position will be liquidated. Similarly, for short positions, if the price of the assets goes as high as the liquidation price, the margin used for that position will be liquidated.
Isolated Margin Vs. Cross Margin
When you are adding margin into your account to open a position, you can categorize that margin into two types:
- Isolated Margin
- Cross Margin
An isolated margin allows you to dedicate a certain amount of funds to a single position. This means if you are running trade with an isolated margin, the outcome of that trade will only affect the funds attached to that position and not the other funds in your account.
On the other hand, Cross margin gives you the option to use the same funds for multiple positions. For example, if you only have $500 and you want to long both Bitcoin and Ethereum, you can open the position in the cross and can dedicate the funds to both positions. However, you must keep in mind that if one of the positions hits liquidation price, all the positions will be closed, and your funds will be liquidated.
Traders who are new to margin trading must stick to Isolated margin as it is much safer and a great option for learning.
Which Cryptocurrency Allows Margin Trading?
There are hundreds of cryptocurrency exchanges out there, but unfortunately, not all of them offer margin trading. Some of the top crypto margin trading exchanges that offer high-quality and secure services include:
Binance is arguably one of the best crypto exchanges in the world, and the leverage trading options it offers are second to none. It offers max leverage of 20x on some cryptocurrencies and is considered a trusted exchange for leverage trading. With Binance futures, you will have access to the following:
- Over 13 different pairs for future trading
- Competitive fees for trading, deposit, and withdrawals
- Earn interest on your wins by putting into Binance Savings account
- Enjoy max leverage of up to 20x
Maker fee: 0.0% to 0.02%
Taker fee: 0.01% to 0.04%
You can start trading on Binance futures today by clicking on the highlighted text and can get a 10% discount on the trading fee.
ByBit is among the top cryptocurrency exchanges when it comes to margin trading. It is a high-quality website that promises no server downtime and fast order execution. The exchange engine it uses for leverage trading is also quite advanced and provides a seamless trading experience. Some of the highlights of this exchange include:
- Max leverage of up to 100x
- ByBit can process 100,000 transactions per second
- Risk management Tools
- Test-Net for practicing
- Mutual Insurance
- 24×7 customer support
Maker Fee: -0.025%
Taker Fee: 0.075%
PrimeXBT is a crypto margin trading exchange that not only offers access to crypto markets but also offers Forex, commodities, and indices with Bitcoin as collateral. The exchange offers advanced leverage trading tools that you get on sites like TradingView. Some of the main features of PrimeXBT includes:
- Advanced Trading Tools for TA
- Max leverage of up to 100x
- Access to different markets with Bitcoin as collateral
- PrimeXBT Covesting offers copy trading to boost returns
- Referral rewards
Maker Fee: 0.05%
Taker Fee: 0.05%
You can sign up on PrimeXBT today and claim a 50% bonus on your first deposit with this link.
Phemex is another top cryptocurrency derivatives exchanging platform that offers advanced order types and a modular user interface. It also allows its users to create sub-accounts so that they can trade from different accounts. Phemex offers:
- Max leverage of up to 100x
- Advanced trade orders
- Supports sub-accounts
- Modular user interface
Maker Fee: -0.025%
Taker Fee: 0.075%
Can You Margin Trade Crypto in the US?
Margin trading is considered a different financial product than regular crypto trading and is prohibited in the United States because it is considered highly risky.
Margin trading is popular in the crypto space, but it is not designed for all kinds of traders. You can double or triple your investments in just a few days, but you can also end up losing all your funds in no time.
Traders who are new to margin trading must trade with low leverage and margin and must always opt for trusted cryptocurrency exchanges like ByBit and Binance. In order to become successful at margin trading, a trader must know how to do in-depth Technical Analysis (TA) and Fundamental Analysis (FA).