Imagine trading cryptocurrencies such as bitcoins, to buy a single bitcoin is expensive but did you know you can buy using almost half of the price? Some brokers offer Margin trading where you can apply leverage to take a significant trade position. In this post we will focus on how you can amplify your balance to trade significant volumes with margin, we will illustrate how it is executed and some of the websites that offer cryptocurrency margin trading.
What is Margin Trading in Cryptocurrency
Margin trading is where brokers allow traders to borrow some funds to amplify their trading balances. You get a loan from the broker to trade for a fee or some commission, websites offering margin trading have different pricing levels on the margins.
Leverage in Cryptocurrency Trading
The leverage is expressed as a ratio; example is 2:1 or 4:1 where for every one dollar you get extra 3 and 1 respectively. You can apply the 2:1 leverage to buy bitcoin worth $10,000 when your account balance is only $5,000 where the brokers loans you the extra $5,000.
Imagine of a situation where you want to buy a stock that you anticipate its value will appreciate in the future, but you don’t have enough cash, you can borrow from friends to top up your balance. If the stock is going for $100 and you only have $50 you get loaned the balance of $50 and buy the stock. When the value of the stock appreciates by 50%, its value will be worth $150. You can sell it for the $150, return the $50 borrowed from a friend, and there you have a cool profit of $50 above what you had at the beginning, it’s that amazing?
In a cryptocurrency trade, you can apply leverage. Assuming the price of one bitcoin is $6,500 and this is what is in your wallet balance, using leverage of 2:1 you can buy two bitcoins ($1300), the extra cash begin a loan on applying leverage. If the bitcoin prices go up by 50%, you will now be having two bitcoins in your wallet worth $19,500
1 Btc= $6500
2 Btc= (2*6,500) = $13,000
50% up = (1.50%* $13,000) = $19,500
Balance: 19,500-6,500= $13,000
Profit: 13,000-6,500= $6,500
You can sell the two bitcoins at the value of $19,500, return the loan from the broker $6,500. And you end up with a balance of $13,500. You, therefore, make a profit of $6,500.
If leverage was not applied the profit would only be;
1Btc= $6,500
50% up= $9,750
Profit= 9,750-6,500= $3,250
Applying leverage, therefore, amplifies the profits you make.
Margin trading can also be applied when you anticipate the prices will drop, therefore, take a short position.
Imagine you have $10,000, and bitcoin is going for $10.000, you can apply as 3:1 leverage. You borrow 2 bitcoins and sell them at $2000 (2Btc*10000) you get $30,000 in your wallet balance. When the price of Bitcoins falls to $ 5,000, you buy two bitcoins for $10,000 and return to the broker. You, therefore, end up making a profit of $20,000.
Risks on margin trading
Margin trading is risky and should only be carried out on a short-term trade. The prices may go against your bet, and this can result in huge losses which could even wipe out your account balance.
If you took a long position trade applying leverage where you expected the prices to go up but it ends up going on the opposite, you would incur loses. If you opened a long position for bitcoin applying leverage of 2:1 where the bitcoin price is $6,500 you buy two bitcoins at $13,000 and the price s of the bitcoin drops instead of appreciating, you will get a margin call or the position will be liquidated.
The position will be liquidated by the broker where they will close the position by selling your bitcoin to recover the money they have loaned you. If for instance, the price dropped by 50% your two bitcoins will now be worth (50%*13,000)= $6,500 they will sell them and recover the loan they gave, and your account balance will be wiped up.
Margin Calls
A margin call will be where your broker will notify you to top up your wallet balance to cover the position. For instance in a 2:1 margin before the price drop gets to 50% you will be required to top up your account to cover the margin, it’s like topping up as collateral to the loan the broker provided.
Where to trade on margin
Websites offering cryptocurrencies Margin trading include HitBtc , Kraken, CEX.io Bitmx and Bitfinex. You can also trade crypto and Forex applying margin on eToro.
Margin trading is, therefore, an excellent tool to amplify your profits in a trade position. However margin trading risky where the prices go against your prediction, this can be reduced by using a stop loss in an order. A stop-loss is where you set the maximum loss you can withstand. If for example, you place a stop loss at 10% and the process s fall by 10% the position will be close, and you only make a 10% loss.
Blockchain and Cryptocurrency enthusiast.
Founder CryptoKibao
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