Features of cryptocurrency margin trading

January 14, 2020   Bitcoin

Each tradable asset in the financial market has its own characteristics and features. Some assets are more volatile, but at the same time they entail considerable risks, others are very easy to analyze, but at the same time they are relatively stable in price and as a result, the potential profit is insignificant. As for cryptocurrency, traders have every chance of getting a substantial profit in the case of an accurate approach to trading. Moreover, forex brokers offer margin trading services using leverage nowadays.

Cryptocurrency does not cease to interest traders all over the world as a profitable financial asset for speculation transactions. And as long as trading physical assets is financially impossible, because If you need to ensure a significant deposit size, then margin trading cryptocurrencies will be more comfortable.

Margin trading briefly


Margin approach involves the use of leverage in the process of trading by a trader, which, in turn, helps to increase profits without investing own funds. The marginal approach differs from the usual trading on the financial market in that the trader speculates not only with his own funds, but also with borrowed money, which he takes “on credit” from a broker (or exchange) against his assets. Not for free, of course. The spread is the payoff - the difference between the purchase price and the sale price of an asset, as well as additional commissions are charged, as a rule, from the transactions’ turnover.

If we talk about trading fiat currency pairs, then brokers offer leverage from 1:100 to almost infinity. For example, some brokers allow their customers to trade with leverage up to 1:2000. Of course, it is worthwhile to understand that the larger the leverage, the greater the amount of borrowed funds is used, which means that the risks increase in proportion to this. So those traders who gladly throw themselves at such conditions without weighing all the pros and cons can subsequently regret it very much.

In the case of trading cryptocurrency, the leverage is from 1:1 to 1:5 maximum. True, in the diversity of forex companies, you can also find unique “brokers” that offer transactions with leverage more than the above-mentioned size, but it is worthwhile to understand that such brokers are clearly not worried about the interests of clients and push them to rash decisions.

An example of margin trading cryptocurrencies


In order to understand how margin trading looks in action, it is easiest to give an example that clearly shows how leverage works.

Imagine that a trader has $100 in deposit. At the same time, he works through a broker who offers the use of cryptocurrency as tradable assets. Observing the market, the trader notes that according to the indicators, it is likely that Litecoin (an asset selected solely as an example) will begin to rise in price in the very near future. For this, the trader needs to purchase an asset and then sell it more expensive, earning profit on it.

But he can only buy 1 LTC (or even less) for $100, which does not suit an enterprising speculator at all. He has no opportunity to add more funds. How to be? Of course, use the leverage.

The amount that a trader can borrow from a company is determined by the company itself. So, a leverage of 1:1 indicates that the trader can borrow from the broker the same amount that is currently on his balance sheet. If this is $ 100, as in our example, then the deposit will be the same amount - $100. Total on the client’s account will be $200, half of which is his personal, and $100 borrowed. A leverage of 1:5 indicates that the trader receives a security deposit of $500, etc.

Cryptocurrency Margin Trading


So, imagine that a trader uses a leverage of 1:3 with еру deposit of $100, as we noted earlier. Thus, he receives a loan of $300 and in the end can buy as much as 4 LTC for the available $400. And now suppose that the price of an asset really began to grow over time and reached an increase of 30%. Now LTC price is $130. It turns out that the profit is $90.

Using the leverage from a broker, a trader can now buy more assets than for his own money solely. But it is worth remembering that for this he will have to pay a commission, the size of which is also set by the broker. Let's say in our example, the broker's commission was 0.2%. It turns out that by returning the deposit to the broker ($300) and giving a commission, the trader gets his net profit of about $88.

Features of leverage cryptocurrency trading


Above, we examined the situation in which the trader was “lucky”, he was the winner. But no one is safe from a situation in which the market may go against the expectations of a speculator. As an alternative, the financial result of the trader will not be $90 profit, but $90 loss. At the same time, the broker is not at all interested in the fact that the client suffered a loss and will demand to return the borrowed funds, as well as the commission set for this.

As soon as the trader’s finances are on the verge, the broker forcibly closes all positions (the well-known margin call). Each exchange has its own level of this indicator - it is necessary to carefully read the broker's trading conditions. The situation is deplorable - because it means that the trader is aground, and he still has to return the loan funds and the required commission. Therefore, the client is required to replenish the deposit with his own funds in order to cover losses.

Leverage cryptocurrency trading


Another feature of working with leverage is the fact that assets acquired with borrowed funds only theoretically belong to the trader. So, when buying assets with your personal funds, the trader has every right to withdraw funds from the account at any time, put into trade or spend as he likes. When working with credit funds, such liberties are unacceptable and you have to reckon with the conditions of the creditor (broker).

Tips for beginners


Trading with borrowed funds, although it can bring more profit, entails the risk of loss of all funds. So leverage must be used with the utmost care.

We will give some practical advice to those who are just starting to work in the financial market with cryptocurrencies, using margin trading conditions:

  • Apply leverage of optimal sizes. If we are talking about working with cryptocurrency, then the leverage should be 1:1 or 1:2. At the first stage of acquaintance with virtual currencies and the market as a whole, this will be more than enough.
  • Work only with assets, which are currently the easiest to predict.
  • Determine for yourself the maximum amount of loss and in no case do not cross this line in the pursuit of winnings.
  • Do not forget to set limit and stop orders that can save an inexperienced trader from thirst for profit.

Risk warning


Experts remind that before starting to trade in financial markets, each participant must take into account the following: regardless of the asset chosen, trading was, is and will be fraught with risks, the degree of which depends on market activity. And this means that a trader can both make substantial money on market volatility and fail if he loses his capital.

Each participant in the financial market should always be aware of the risks and factors that, one way or another, affect the dynamics of the market. The main risks include a decrease in liquidity, sharp price spikes, high volatility and the onset of force majeure.

We strongly recommend that you study the trading conditions of companies more carefully before starting cooperation with them, while studying the Client Agreement and the Privacy Policy. On our site you can also choose a cryptocurrency broker that is suitable for trading conditions for yourself, as well as a company operating in the Forex market and offering cryptocurrency trading conditions.

Author: Kate Solano for Сrypto-Rating.com
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