Cryptocurrency Margin Trading Pros and Cons
As the normal trading, cryptocurrency margin trading is very risky and it has its downsides and upsides. We will enumerate some pros and cons so you can decide if it’s worth it or not.
Cryptocurrency Margin Trading Pros
While there are big risks to cryptocurrency margin trading, there are some pros that can make it worth it to give it a try. These include the following:
Cryptocurrency Margin Trading Pros: Increasing the buying power
The biggest advantage of cryptocurrency margin trading is to control a much larger position by borrowing from an exchange. And the best part is that you don’t actually have to give the borrowed funds back. If your entry is 1 Bitcoin and you use a 10X leverage, you actually trade 10 Bitcoin, 9 Bitcoin from the exchange. If you’re successfull, everything is good, if you get liquidated, you lose 1 Bitcoin, not 10 Bitcoin.
Cryptocurrency Margin Trading Pros: Potential for fast returns
The crypto market is fast-moving and has deep liquidity. The market volatility combined with the higher leverage available may bring you faster returns than in some other markets, where traders may need to wait for longer term asset value growth and returns from assets traded. Of course, you can also lose your capital faster but we’ll talk about this in the cons section below.
Cryptocurrency Margin Trading Pros: Obtain profits also when the cryptocurrency you trade loses value
This happens thanks to shorting. If Bitcoin value is $8,000, you believe it goes down 20%, to $6.400, and you trade (short) 1 Bitcoin it with 10X leverage, if it reaches your target, you get 20% X 10. Your profit will be 2 Bitcoin. So, 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.
Cryptocurrency Margin Trading Pros: Increased leverage magnifies your profits
Access to leverage can make the difference between small gains in trading and sizable ones. Availability of resources for leverage in the cryptocurrencies market is greater than in most other markets. Depending on where they are operating from, you may be able to obtain access to margin trading that allows leverage of 100X, or more.
Cryptocurrency Margin Trading Pros: Exponential funds growth
Before the existence of margin trading, it was quite a difficult task for small capital traders to grow their holdings rapidly as because they could only take positions as big as their account balance. Cryptocurrency margin trading offers you an opportunity to trade multiple times your capital. Once you have successful trades you can exponentially increase your funds to a more manageable size. 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.
Cryptocurrency Margin Trading Pros: Investing diversification with low capital
You can add a much bigger number of cryptocurrencies to your portfolio by having a small capital. With normal trading, you’re stuck to trade low amounts from several coins. In an account with margin capabilities, you can trade several cryptocurrencies by using the available leverage. Although the exchanges are not offering to many cryptocurrencies for margin trading, you can still diversify your portfolio.
Cryptocurrency Margin Trading Cons
Like in any other fields, there can’t be only pros, otherwise everybody will do this. There are also some cons that you should be aware of. These include the following:
Cryptocurrency Margin Trading Cons: The cryptocurrency market volatility
All markets can show volatility at one time or another, and the cryptocurrency market is not different. While the market volatility can bring you huge profits, it can also bring you huge loses. So, trade carefully and always use a stop loss.
Cryptocurrency Margin Trading Cons: Increased risk
It is one of the most obvious disadvantages of trading cryptocurrencies with leverage. By controlling a larger position than usual means not only that the profits can be bigger, but the losses are also more significant because you can lose everything you traded. The chances to lose your deposit are high due to the manipulative nature of the cryptocurrency market. But, if you lose a stop loss, you stay out of being liquidated.
Cryptocurrency Margin Trading Cons: Small traders may face disadvantages
The cryptocurrency trading is still done by major players and we can say that they can control the market. But this happens in any trading market. This can also be an advantage. Because of the volume of their trading, and their greater access to information and technology, these players can influence price movements in the cryptocurrency market.
Cryptocurrency Margin Trading Cons: Liquidation
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 Cons: Higher fees
Fees also need to be taken into consideration and of course, they vary between exchanges. The higher the leverage, higher the fees. If you trade 1 Bitcoin with 10x leverage, you actually trade 10 Bitcoin and you pay fees accordingly. But that’s normal. The exchange borrows you funds you don’t have to pay back if you lose. At least they earn something from fees.
Cryptocurrency Margin Trading Cons: Higher stress
You have to handle the stress of entering a large position. The best strategy is to ignore the final amount you trade since it includes the leverage. Focus on your funds that you’re trading. And to reduce the stress, always set a stop loss. This way you can sleep better. You took a trade and in case it doesn’t go the way you expected to, you lose apart of your traded amount.