Cryptocurrency Margin Trading Explained

Cryptocurrency margin trading may be the biggest appeal that cryptocurrency trading offers. The ability to trade with leverage is very tempting since you can increase a lot your trading power. Although it’s called “trading”, you don’t actually trade. You actually bet which way your chosen coin will go: up or down.

What is Cryptocurrency Margin Trading?

Cryptocurrency margin trading is a type of trading that gives you the ability to enter into positions larger than your account balance by borrowing funds from the exchange. This way, with just a small change in price moving in your favor, you have the possibility of ending up with huge profits. Imagine you can enter a trade with 10 Bitcoin when you actually hold only 0.1 Bitcoin. It sounds not real, isn’t it? Well, it’s real, but there’s a catch. We will explain this below. Once you understand how trading with leverage or margin works, you’ll notice it’s quite easy.

Below you can see how a margin trading interface looks like. Of course, they are no all the same but this one is the best we have seen so far.

Bybit Bitcoin margin trading main view

How Does Cryptocurrency Margin Trading Actually Work?

Imagine cryptocurrency margin trading like betting. You don’t actually trade since you don’t sell or buy a coin. You bet that the coin value increases (long) or decreases (short). There are 3 big differences between betting and margin trading: you can trade with leverage, you can set a stop loss and you don’t count the money you traded as part of your winning amount, If you bet $100 and you get $200, you have $200. If you trade $100 and the profit is $200, you have $300. In case you don’t have a stop loss and you get liquidated, you lose your traded amount. The same happens when you bet.

Cryptocurrency margin trading allows users with limited capital to trade high amounts of cryptocurrencies by borrowing them from the exchange. By trading cryptocurrency with margin, also known as trading with leverage, you can considerably increase your profits but you can also lose your capital faster. The best part is that you don’t actually pay back the funds you have borrowed. There aren’t too many exchanges that offer such kind of trading but there are enough to choose from.

Most of the cryptocurrency margin trading exchanges are offering the possibility to trade with a maximum 100X leverage. This means that you can trade up to 100 times the funds you plan to trade. The exchange will allow you to do that but in return, there are 2 things you should be aware of: the liquidation price and the fees.

How to Trade Cryptocurrencies with Margin – Long or Short?

What means opening a short position in margin trading? It means that you enter a trade believing that the price will go down.

What means opening a long position in margin trading? It means that you enter a trade believing that the price will go up.

The best part regarding trading with leverage is that you can make a profit when the coin you’re trading goes up but also when it goes down.

Of course, it is better if you open a long position because besides the profit you get in cryptocurrency, the coin value also increases in fiat (USD, EUR,…). As an example, if Bitcoin value is $8,000, you believe it goes down 20%, to $6.400, and you open a short position of 1 Bitcoin with 10X leverage, if it reaches your target, you get 20% x 10, so 200% profit. Your profit will be 2 Bitcoin. Once the position is closed, you will own 3 Bitcoin, 1 Bitcoin value being $6,400. While Bitcoin dropped 20%, instead of having $6.400, you will have $19,200.

But, if you open a long position, with 20% target ($9,600), also with 10x leverage, once the position is closed, you will have 3 Bitcoin, but the fiat value will be $28,800.

What are the Benefits of trading cryptocurrencies with margin?

The biggest benefit is that you can trade with much more funds that you own. You can make a profit either way: if your coin price goes up or if it goes down. This means you can obtain profit also when the coin you trade loses value.

Another benefit is exponential funds growth. Imagine longing Bitcoin ($8,000) with a 10% target and you trade 1 Bitcoin with 10x leverage. 10% X 10 means 100% profit. You will own 2 Bitcoin. You do this again with 2 Bitcoin and you’ll have 4. One more time and you will have 8. While Bitcoin value increased to $11,613, you will have 8 Bitcoin, so 700% Bitcoin profit. After these 4 successful trades, your funds increased from $8,000 to almost $93,000, instead of holding 1 Bitcoin and having $11,613.

How Much Can You Lose when You Trade Cryptocurrencies with Leverage?

When you enter a trade with leverage, there will be set a liquidation price. This means that if that price has been reached, you lose the funds you used to enter the trade. Of course, you don’t have to enter a trade with your entire account balance. And, there is also a cool feature called “stop loss”. When you enter the trade, you can also set a stop loss and this way you won’t reach the liquidation price. Of course, one your stop loss price has been reached, your trade came to the end and you will lose a part of the funds you traded.

How are the Cryptocurrency Margin Trading fees

Of course, the fees may differ from exchange to exchange. The trading fees are based on the leverage you choose. If you want to trade 1 Bitcoin with 10X leverage, you actually enter a 10 Bitcoin trade and you will pay the fees accordingly. Sometimes the trading fees depend also on the type of order you make: Limit, Market, Conditional. You have to check the fees on the exchange you plan to trade on.

Read the cryptocurrency margin trading beginner’s guide. The guide may give you a good start into the profitable cryptocurrency trading with leverage.

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