Margin Trading Cryptocurrency

Intro to margin trading cryptocurrency

Margin trading is a trading strategy that involves investing assets borrowed from a broker(third-party). 

It allows the trader access to more outstanding sums of capital, allowing them to leverage their positions. However, margin trading cryptocurrency is also risky, as an unlucky trade makes the trader liable for the complete loss. 

Margin trading cryptocurrency boosts trading results so that traders can receive more profits on successful trades. It is prevalent in low-volatility markets, especially the international Forex market, since price movements are easily predicted. Stock, commodity, and cryptocurrency markets also have margin trading options in India.

Margin trading has higher risks in the matters of cryptocurrencies. Owing to the high levels of volatility in these markets, cryptocurrency margin traders should be cautious, and crypto beginners – watch before you jump in.

Interpreting charts, recognizing trends, and determining entry and exit points only help to anticipate risks and trade better more effectively, not eliminate the risks. 

Before you leverage cryptocurrency trades, acquire an intense understanding of technical analysis and spot trading experience.

Definition, purpose, usage

Crypto margin trading might overwhelm at the beginning. As said above, the concept allows traders to acquire capital and access enhanced buying power more than their existing account balance. 

A trader provides the exchange platform some capital in exchange for another type of capital and profits from it.

Initially, a trader must give a deposit to open a position, an initial margin. He must keep a certain amount of capital in their account to maintain the position. 

In cryptocurrency exchange or lending platforms, the capital you deposit is held as collateral by the platform. The amount you’re able to leverage for margin trading depends on the margin trading rules imposed by the platform you trade with and the initial deposit.

Terms to know:

Collateral

The funds you hold in your margin account assure the broker that you can pay off your debt.

Margin call

It is a demand from your broker to add more funds to your margin account—and in case you fail, they can forcibly sell your crypto positions.

Stop-limit order

This conditional trade requires you to set a stop, start, limit the trade’s target price, and a timeframe where the order is executable. Your trade is filled when you want. If the price goes up or down, depending on your preferences, the trade is canceled.

Stop-loss order

Similar to a stop-limit, it is a handy tool for leverage trading. A stop-loss order lets you fix the limit till which you can take a loss. If you fix it to 5% and the asset’s price falls to that amount or more, it is sold immediately, so you incur only a 5% loss.

Trailing stop

This is a type of stop-loss order that can lock in profits. This is beneficial for anyone who wants to let emotion take a backseat when deciding when to exit a position.

Margin vs. leverage

Margin is the percentage of the total order that the trader has to commit. Margin refers to the loan your margin trading crypto exchange grants you to place larger trades. The funds collateralize this loan in your account, and you will need to pay it back with interest.

Leverage is the borrowed money the trader uses to make up for the difference between your margin and the order total. 

Traders use margin to create leverage-the increased buying power that allows you to open more prominent positions than the funds in your account would allow. Leverage is expressed as a ratio, such as 2:1 or 5:1.

Pros and cons

The most significant advantage of crypto margin trading is its profit potential. 

Let’s say you go for 100x leverage. If your margin is 10 BTC and the trade is victorious, your profit will be like you invested 1000 BTC. 

Most margin trading platforms will let you choose the leverage amount you’re most comfortable with and work from there. The trader gets to decide what leverage you want to use. Margin trading lets traders open many positions with small investment capital. 

Having a margin account makes it easier for traders to open positions without shifting large sums of money to their accounts.

The biggest drawback is if your trade is unsuccessful and you lose funds, you still have to pay your broker back. If the loss is a lot to take in, you risk dissipating everything you have. 

Here the stop-loss orders come into play—knowing how to use the tools at your disposal is of prime concern. Unlike regular spot trading, margin trading carries with it the odds of losses that exceed a trader’s initial investment. Hence it is regarded as a high-risk trading method. Depending on the amount of leverage involved in a trade, even a tiny drop in the market price may cause substantial losses for traders.

What to keep in mind

Unquestionably, margin trading is a valuable tool for those looking to magnify the profits from successful trades. 

If used properly, the leveraged trading presented by margin accounts can assist in both profitability and portfolio diversification. When margin trading on crypto exchanges, there may be a fee or interest on the borrowed amount.

The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that we are not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. CA Mitesh and Associates is Mumbai's leading Cryptocurrency Taxation Firm which is committed to helping people navigate complex tax laws and banking regulations. Our main aim is to assist the individuals with applicable laws & regulations compliance and providing support at each & every level to make sure that they stay compliant and grow continuously. For any query, help or feedback you may get in touch here - Appointment with CA. Please note the all consultations with the CA are Paid consultations.

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