Bitcoin and Altcoin Margin Trading for Beginners
For traders with a limited number of crypto capitals, i.e. bitcoins and altcoins, there is the possibility of using margin trading to add leverage to investments. This capability increases the investment opportunity of the trader without actual ownership of the assets, meaning you use your Fiat assets technology to “rent” crypto assets. It is important to note that margin trading is not recommended for everyone and has a high risk.
What is margin trading?
Margin trading allows the trader to open a position with leverage. For example, we opened a margin position to buy with a 1:3 leverage. This means that we will need three times less of our own funds to open a deal. Let’s imagine that our basic asset has risen by 10%. Our position will bring us 30% profit thanks to the 1:3 credit shoulder. About ordinary, non-margin trades we can say that they are traded with leverage 1:1 (without borrowed funds).
Margin trading has close links with the lending market. Lenders provide loans to traders so that they can invest in large volumes of cryptocurrencies, and lenders receive interest on loans. In the case of trading through a broker, the lender providing leverage is the broker itself. For example, the international broker FXOpen provides leverage on bitcoin 1:3 or 1:10.
Features and risks of margin trading
As mentioned above, the cost of the margin position includes the payment of interest for the “rented” coins, as well as the fee for opening a position through a conventional exchange operation. As the opportunity to earn money through the use of leverage grows, so do the possible losses. However, the maximum we can lose is the amount we have invested to open a position. This level is called liquidation value. Liquidation value is the cost at which the exchange automatically closes our position, so we will not lose borrowed money, but only own money.
For example: if you are talking about standard 1:1 leverage trading, the liquidation value is when the position reaches zero. As leverage increases, the liquidation value will approach our purchase price. For example, the value of bitcoin is 1000 dollars, we bought one bitcoin (opened a long position) with a leverage of 1:2. The cost of our position is $1,000, and we borrowed another $1,000. The liquidation value of our position will be just over $500, because at this level we lose exactly our initial $1,000 plus interest and fees. Margin trading can also be against the market, we can also open short positions with leverage.
Margin trading tips
Learn risk management. When trading on margins, it is especially important that there are clear rules of risk management, beware of excessive greed. Consider the amount you are willing to risk, and remember that it may be completely lost. Set clear levels for closing positions, take profit and stop-loss.
Particularly important is that altcoins are considered to be assets with excessive volatility. Marginal trading of cryptocurrencies, at least, doubles both the risk and possible income. Therefore, try to make short-term trading positions using borrowed funds. In addition, while daily fees or margins are low, in the long run commissions may amount to a significant amount.
Take extreme movements into account. Crypto trading sometimes has extreme fluctuations that occur in both directions (so-called straits). The risk in this case is that the depth will affect our liquidation value. This can happen when leverage (leverage) is relatively high, so the liquidation cost is relatively close. In fact, you can take advantage of these straits and try to establish successful take-profits, hoping that these straits will run over them, leaving you a decent profit and then returning to the previous price.
Brokers that allow margin trading
Now you can use margin trading on most crypto exchanges and some brokers. The benefits of leverage trading from a broker are obvious, and another important advantage is the security aspect. Crypto traders should strive to minimize the number of coins they hold on exchanges.
Trading with a broker, you can be sure of the safety of your funds, thanks to the standards of safety tested for years. For example, the broker FXOpen is a member of the Financial Commission.
Margin trading allows us to open increased positions without the need to provide full security with bitcoins, so we can keep fewer coins on the stock account. For example, if our portfolio consists of five bitcoins, and we want to insure against the risk of its fall, a short position with 10-fold leverage can be opened, and it will be equivalent to 40% of our bitcoin portfolio. Only a tenth (leverage 1:10) is required to open the position. This means that we only need to keep 0.2 bitcoins in the account.
The company mentioned above FXOpen gives its clients the opportunity to conduct a margin trading on a special bitcoin account with leverage 1:3 or 1:10, which allows you to start trading on cryptocurrencies with a broker with a smaller amount and get additional profit due to increased trading volume.