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Everything You Need to Know About Margin Trading on Cryptos

crypto margin trading

March 22, 2021 | 

598 Views | 

JOHN K MWANIKI | 

Get Into Cryptocurrency Trading Today

When it comes to trading, higher risks come with higher returns. Margin trading in finance is among the trading strategies that attract good returns but also carries significant risk. Margin trading on cryptos is whereby investors use debt to trade. They borrow money from the brokers and use it to trade. The borrowed money is used to leverage their existing cryptocurrencies.

Understanding how it works can sometimes be overwhelming but also easy to understand with examples. 

For instance, if you have $30 in cryptos and want to buy $100 cryptos, you can borrow $70 from the broker to buy the $100 worth of crypto. In essence, you have to pay back the $70 to the broker with the borrowing fees included; then, you get to keep the rest. How does the brokerage ensure that it gets its money back? 

The exchange allows you to trade but calls you in when you get to a point where you start losing money. That way, they will enable you to trade and make profits and at the same time prevent you from losing money. 

Things you need to remember when margin trading on cryptos

There is a lot you can get from margin trading on cryptos, however, and to stay on top of your game, here is what you need to remember.

1. The strategy can lead to increased profits and also losses

If the crypto price falls way below what you trade with, then it means that you could lose money. Remember that regardless of the market conditions, the brokers' fees and debt must be paid back. There is a possibility that the cryptocurrency will fall below what you invest, which will lead to you remaining with a smaller investment than you started with.

The same applies to profits. Borrowing will increase your trading power, which exposes you to more profit. The borrowed money could open up the way to you, making way more than you initially had in crypto.

2. It is a high-risk trading

Note that margin trading on crypto is not like regular trading. It is riskier. The strategy is by itself risky even when you are trading the regular instruments. Things get more heated when it comes to cryptocurrencies. 

With this knowledge, it is always best to start margin trading with lower stakes. Only invest what you are willing to lose. Also, spend some time learning about technical analysis so that you can predict risk and make better trading decisions.

3. A guaranteed stop-loss order can help you avoid losses

This is a risky trade, and it is a great idea to install a guaranteed stop-loss order. This way, you can specify the price you should stop trading if you are trading in volatile times. A guaranteed stop-loss order is allowed in margin trading to prevent unexpected losses in the event of volatile price changes.

4. Goal setting is important

Just like when working on any important project, goal setting is critical. It is probably the first thing you should do before you start margin trading on cryptos. Have everything from a profit strategy to determine the amount of money you will trade with and the average you will work with. 

Also, have an exit goal to define plans such as stop-loss levels to prevent losses after achieving a specific profit mark.
Goals will go a long way in determining your trading road map and prevent unnecessary losses.

5. Consider the fees and interest when choosing a broker

When looking for an exchange that allows margin trading on cryptos, ensure that you shop around for reasonable interest rates and fair fees. All exchanges charge for this, although the prices will differ. Ensure that you have all the information you need on the various fees incurred in trading.

Why you should margin trade on crypto

While there are tons of risks involved with margin trading, it does not mean that you cannot give it a shot at all. The benefits include:

1. More profits

Margin trading bitcoin opens you up for more opportunities to make profits. Remember that the more you invest, the higher the profit margins you will get. Unfortunately, traders don't always have enough money. Borrowed money can expose them to opportunities that they may otherwise have not had. 

2. It is an excellent option for diversification

It is usually challenging to diversify if you have low purchasing power. Borrowed money helps the investors have a high purchasing power, allowing them to diversify their investment. Through diversification, the trader can reduce risk and also maximize the returns.

Most importantly, the strategy gives the trader a chance to open several trade positions with only a small amount of capital. 

3. Gain experience in different trading strategies

The other benefit of margin trading on crypto is that it exposes the trader to more techniques. These may come in handy even during regular trading. How does this happen? Margin trading focuses on leveraging market swings to make profits. Thus, an investor is expected to do research and carry out technical analysis to execute the complex trades. 

How to choose an exchange for margin trading on crypto

Margin trading is risky, and so is crypto trading. You can therefore imagine the level of risk a trader may be exposing himself to using this strategy. However, there is a bright side to this. If you play your cards well, you are bound to make a lot of profit and get lessons that will benefit you as a financial investor. 

The other important thing in margin trading is picking a suitable exchange. They are many and different in several ways. The critical features to look at and compare include the leverage amount and the credibility of the exchange. If it is trusted for this kind of trading, then go for it. 

Look at the availability of trading tools such as technical analysis charts and the availability of various trading options. Look at all the above factors and make the ideal exchange for margin trading on crypto. 

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