Cryptocurrency Margin Trading for Beginners with Bitcoin and Altcoins

Margin-Trading-for-Beginners-with-Bitcoin-and-Altcoins

So you’ve been hearing a lot of things within the crypto world about this ever-profitable system called “margin trading” and stumbled across this article because you need a little real insight on what to do next. Well you’ve come to the right place, if you want an unbias review of how it works and if you should be involved.

So What Is Margin Trading?

Simply put it allows traders to trade with money they don’t inherently own at the moment of trading. Margin trading allows you to open up a position on what’s called “leverage”, which is essentially the process of borrowing money from the actual exchange in order to purchase a much larger amount of cryptocurrency as opposed to utilizing your own money. So for example, if we had an open position at 2X leverage at $50, we would essentially be trading with another $50 of the exchanges money, totaling $100.

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Standard “long position” trades are traded at a leverage of 1:1. With leverage trading you can double, triple, or even quadruple your leverage, thus exponentially increasing your profits (or losses).

PRO TIP:  limit your potential losses by implementing a stop loss with every margin trade. We cover more on the stop losses topic here.

So by now you might be asking yourself, “why would an exchange lend me money if there is a good chance I might lose it?” Well, the short answer is, your obviously going to pay for the losses on that loan amount with your current money.

This is better explained with a real world example…

Let’s say you opened a leverage position with $100 of your own money. Now if you 2X your leverage then you’ll receive another $100 from the exchange bringing you to a total of $200. Now if the cryptocurrency coin your trading drops by 50%, it’s now worth $100. You essentially just lost the exchanges borrowed money and have to pay them back with the $100 of real cryptocurrency you just deposited, plus interest.

You can also look at it like this; you’re essentially doubling, tripling, etc. your profit or loss percentages. If the cryptocurrency goes down by 10%, you really just loss 20%, however if it goes up 20%, you just gained 40%. Either way you look at it, your risking more to make more, and at a much faster rate.

Margin trading allows you to make larger bets than you presumably would be able to afford at the cost of extra fees and risk.

The Risk And Reward Of Margin Trading

risk-vs-reward-margin-trading-cryptocurrencyNow there is a cost to margin trading in the way of interest. Paying interest for the borrowed cryptocurrency (it could be the exchange or other users) can differ from one exchange to the next. The maximum amount that you can lose is the amount that you originally invested into the position, so if your coin goes down by 50% and you’re at a leverage of 2X, then you just lost all your coins.

This is also referred to as liquidation value. This value, at which the exchange automatically closes your position at, is there so that you don’t actually lose any of the lenders money (or the exchanges).

Again, in the example we used above, if you lost $100 of your $200 position, then your trade is essentially closed by the exchange because you just lost all of the lenders money. However, in reality your position would close at around the $90-$95 mark, as you have to pay fees on the borrowed money.

Short and Long Positions

Most people know what a long position is as its very simple concept to comprehend. You look for a place to “buy the dip” and if it goes up 10% on $100, you now have $110. Simple right?

Well a short position is a bit more difficult to understand, however just know that this is a trade where you expect the price to decrease. If you think that a particular cryptocurrency is about to drop you could open up a leveraged “short position” by telling the exchange to sell you borrowed money so that you can buy it back later. 

Well a short position is a bit more difficult to understand, however just know that this is a trade where you expect the price to decrease. If you think that a particular cryptocurrency is about to drop you could open up a leveraged “short position” by telling the exchange to sell you borrowed money so that you can buy it back later.

In other words, if you open up a 2X short position with $100, and it went down 50%, you would earn $100, thus coming out of the trade with $200. If the trade went up 50% then you would have lost $100 in the exchange which would automatically close out your position.

Quick Tips For Margin Trading

  1. Managing your risk – before margin trading make sure that you have established a clear set of rules as to which you are willing to abide by. This should work for both profit and loss scenarios. Write them down if you need to, and post them on a sticky note in front of you as an added reminder. As far as establishing a loss you want to set a stop loss.
  2. Get in and get out of a trade – Trading cryptocurrency is already considered extremely volatile, however margin trading doubles that risk. Only use margin trading for short-term trades (aka – scalping). In the long term the fees of holding a margin position can amount to a significant sum, so no hodling here.
    PRO TIP: there’s generally a set time limit on margin trades. If you can’t execute your trades within the set time limit, the leverage portion of your trade will be settled after once that time limit has expired.
  3. Look for extreme fluctuations (volatility) – look out for deep price fluctuations as they tend to bounce quickly. When price action dips, look at a turnaround point using candlestick patterns or significant chart patterns and then time your leveraged buy at that price for a quick flip. Make sure all your patterns and indicators line up before you do this.

What Exchanges Offer Margin Trading?

  1. Cex.io (users who click this link and sign up will receive a 10% fee discount for 6 months) This is a great place to start getting your feet wet with margin trading. Compared to other margin trading exchanges, it has a very intuitive interface and is easy to pick up.

  2. Bitmex is for those who are more advanced traders (which you should be before even considering margin trading) and offers a much higher leverage option, up to 100X leverage. Bitmex also has a great reputation with many traders and also one of the leading margin trade exchanges.

  3. Bitfinex has the largest trading volume of bitcoin within the . US. The market offers margin trading at a leverage of the 3.3X. The user interface is very simple to understand and carry out everyday transactions. This is also a “go to” platform for margin trading amongst traders.

  4. Kraken – is a US-based cryptocurrency exchange operating out of Canada. They offer a full 28 day margin trading term and allow you to leverage up to 5X.

  5. Poloniex is the largest and one of the oldest cryptocurrency exchanges. You can leverage trade up to 11 altcoins at a time. Leverage trading however is only available at 2.5X. There are also relatively high interest fees when playing short positions.

Should You Margin Trade?

I strongly suggest you stay away from margin trading unless you have a lot of experience trading and have done an ample amount of research on the cryptocurrency that you’re about to trade. Trading cryptocurrency is stressful enough without having to worry about borrowing funds, along with the interest applied. This only magnifies your stress level. 

I strongly suggest you stay away from margin trading unless you have a lot of experience trading and have done an ample amount of research on the cryptocurrency that you’re about to trade. Trading cryptocurrency is stressful enough without having to worry about borrowing funds, along with the interest applied. This only magnifies your stress level.

If you begin margin trading, you can easily wipe out your entire trading exchange balance when a coin goes south all the sudden, whereas if you’re simply trading long (with your own money), you can always recoup those costs with time by holding onto the coin to recover (or as they say in the crypt world hodl).

However if you’re a “logical” risk taker and want to give margin trading a chance, make sure you have the experience to back it up. Read over all margin trading ratios and calls within the documentation of any given exchange that you’ll be trading on before taking that dive. Good luck and have a safe swim 😉

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