There are Multiple ways to trade cryptocurrencies, but what exactly does it mean? It means taking a financial position with respect to the price direction of individual cryptocurrencies against the dollar, according to crypto/dollar pairs, or with respect to another cryptocurrency, from crypto to crypto pairs.
What is margin trading
We hear more and more in the cryptocurrency arena about shorting Bitcoin, crypto margin trading, margin trading with cryptocurrency leverage: all refer to the same phenomenon, namely trading bitcoin and cryptocurrencies with leverage.
To put it simply, by bringing to bear one of the peculiar features of cryptocurrencies, namely volatility, it will be possible to make profits both when the market is in an upward phase (and prices go up) and when it goes through a downward phase (and prices go down). All precisely through margin trading, a phenomenon that affects Bitcoin and cryptocurrencies. Let's find out more about what it is!
Margin trading in crypto: how it works
We start by defining, for the margin trading, what is it. This is a financial option also called leveraged trading, which indicates the amount by which, by adopting leverage, you can multiply your position.
Let's try to explain ourselves better with a example. A trader opens a 100X leveraged trade. He will thus be able to increase his exposure with an increase in turnover greater than 100X. It means, at the same time, that while possible profits see a surplus of 100%, the same percentage also affects losses. This is in theoretical and general terms, since the most pessimistic eventuality, that is, losses amounting to a total of 100 times, is really unlikely to occur.
How so? Thanks to the so-called call margin. We explain what it is by illustrating how crypto margin trading works. The steps are as follows:
- The trader uses an exchange platform to trade Bitcoin.
- It provides an initial deposit so that you can open your position, called initial margin or initial margin: a deposit that is provided as security for one's position.
- To keep the position open, the trader is required to have a specific amount of capital, called maintenance margin or maintenance margin.
This is the basic operation of crypto margin trading. Let's go into even more detail.
What does long or short mean
There are several leverage margins, depending on the exchange platform one chooses to use. Leverage can be indicated according to different types, in fact, depending on the specific rules of the broker providing the trading service, also inherent in the amounts and maximum leverage, to be used for each trade. Reading them carefully is essential.
Crypto margin trading can be long or short. In fact, we talk about Margin Trading Short and Margin Trading Long. What does it mean? Just a moment longer, we will tell you now. The moment you have a way to open a position inherent in cryptocurrency you are given a choice between long or short, short or long.
A Margin Trading Long involves taking a long position. This is preferred by those traders who think that the price of Bitcoin or another crypto will increase over time.
And the Margin Trading Short? It works the exact opposite way: a trader who opts for a short position considers that the asset of Bitcoin or any other cryptocurrency will tend to decline in value over time.
Underlying the choice of a long or short strategy is the forecast, but also personal vision, on the cryptocurrency's performance. The moves to be made are different depending on whether it tends to increase or decrease in value over time.
There is a lowest common denominator in the two strategies: the fact that in both cases the exchange platform always retains a margin as collateral and will release the profits earned. In the event of a loss in excess of the margin guarantee this will be retained by the broker, who may avail himself of the option to automatically liquidate the position. In this case it is said that the liquidation price, or the liquidation price.
The advantages and disadvantages
Let's look at the pros and cons of investing by margin trading. Let's start with the elements in favor, namely:
- Profits, even significant ones, when you have set up your strategy effectively.
- Ability to access a wide diversification of positions.
- Immediate access to more funds.
- Opportunity to learn the discipline of trading.
And the unfavorable factors Of margin trading in crypto? They are somewhat the flip side of the disadvantages and depend precisely on the effectiveness of the strategy adopted. While the profits that can be taken home are considerable, so are the losses: greater than those achieved through other financial solutions.
Money can be lost quickly, complicit in the market volatility. It is, in fact, about High-risk negotiations that require high-level expertise at the base. Training is continuous, but it is also true that it is imperative to already have knowledge at the start.
Is investing with margin trading safe?
And we come to perhaps the most important question, which is: is margin trading safe? While it is commonly regarded as a market with risks that should not be underestimated, given the volatility and young age of cryptocurrencies, including Bitcoins (the first to be introduced), in the case of a experienced trader things change.
An experienced and knowledgeable person who is able to institute effective management strategies with regard to risk will be able to gain noteworthy opportunities from margin trading. Basically, we can say that the crypto margin trading is not the optimal option for novice traders.
The risks are there and must be put into context, not taken lightly; the exchange platforms themselves warn. Profits must be earned, with this type of solution, they are not guaranteed. Consciously assessing not only what you are getting into with margin trading but also your own preparedness will help you make the best choice. Keeping in mind that having strong nerves and management skills is essential.