What if you could trade with more funds than you actually have in your account? Imagine having $1,000 deposited but being able to effectively trade with $2,000, $3,000, or even $10,000. Well, that’s entirely possible on many cryptocurrency exchanges through margin or leveraged trading.
In this guide, we will explore what margin trading in Bitcoin and crypto is, how it works, the top exchanges that enable margin trading, and some must-read tips before placing even the smallest margin position.
What is Bitcoin Margin Trading?
Bitcoin margin trading allows you to use funds provided by a third party, usually the exchange you’re using, to amplify the results of your trading. This means that your profits can be expanded, but so can your losses. It’s especially popular in low-volatility markets, but it’s gaining traction across the board.
For instance, if you open a Bitcoin margin position with 2X leverage and Bitcoin’s price increases by 10%, your position would yield a 20% return due to the leverage. Without leverage, it would have yielded only a 10% return. Margin leverage can range from 2X to 25X and even higher, multiplying the potential gains and losses.
Best Bitcoin & Crypto Margin Trading Exchanges
How Does Bitcoin Margin Trading Work?
In most cases, users can borrow funds through the exchange, which are sourced from other users who earn interest or from the exchange itself. This allows traders to increase their trading capital and open larger positions. Each position has a liquidation price, determined by the amount of borrowed margin, to minimize risks.
How to Short Bitcoin and Other Cryptocurrencies?
Margin trading also allows you to make gains when the price of Bitcoin (or other cryptocurrencies) is decreasing. By taking a short position, you bet that the price will decline. For example, you can sell Bitcoin at the current price, borrow it, and then rebuy it later at a lower price. The difference between the sell and rebuy prices becomes your profit.
Cross Margin vs. Isolated Margin
Exchanges offer two modes for margin trading: cross margin and isolated margin.
Cross margin uses the entire margin balance across open positions to prevent liquidations. If a position gets liquidated, it may impact the trader’s entire balance and other positions. On the other hand, isolated margin allocates a specific margin to each position. If a position is liquidated, it won’t affect the rest of the trader’s balance.
Bitcoin Margin Trading Vs. Futures Trading
Bitcoin margin trading and futures trading are often confused. However, there are fundamental differences:
- Markets: Margin trading takes place directly in the spot market, while futures trading involves contracts in the derivatives market.
- Leverage: Futures trading offers higher leverage, often reaching up to 100x, compared to margin trading’s average of 3x to 10x.
- Trading Fees: Margin trading fees follow the spot market, while futures trading fees are based on the derivatives market.
Margin Trading Tips: Read Before Placing Orders
Margin trading carries an amplified risk and is not recommended for beginners. Here are some tips to help you navigate this type of trading:
- Start with small amounts to gain confidence and experience.
- Divide your positions and create a ladder of prices to reduce risk and average down your entry price.
- Understand the fees involved and monitor your liquidation price.
- Set clear risk management rules and use stop-loss levels to prevent full liquidation of your position.
- Be aware of price manipulations and keep an eye on market events.
- Pay attention to short-term trading and ongoing fees for borrowed margin.
- Stay vigilant during extreme volatility to avoid liquidation.
Costs and Risks of Crypto Margin Trading
While using borrowed funds, you can’t end up owing money to the platform. The most you can lose is your balance, which leads to liquidation if the price moves against your position. Additionally, ongoing interest and fees for opening and closing positions contribute to the costs of margin trading.
Margin trading offers both opportunities for greater profits and increased risk. It is essential to understand the risks involved and always trade with funds you can afford to lose.
For more useful tips on crypto margin trading, follow our comprehensive guide.