The margin trading in cryptocurrency refers to take a loan from exchange or brokers to trade the cryptocurrencies in case of non-availability of the required full amount in the trading account. The loan amount borrowed has to be returned with interest to the lenders. Margin trading is usually opted to increase buying power. Imagine having only $500 of cryptocurrency (bitcoin) in your account and wishing to trade worth $1000 of cryptocurrency (bitcoin) employing margin trading. The only option you have is to borrow $500 more from an exchange or your broker into your account so that you can place an order.
While margin trading can magnify your gains, it can also amplify your losses. You need to be aware of this risk associated, before even considering to use margin trading. You can't deny the possibility of losing your entire balance.
The Margin trading concept finds its place in both short and long position cryptocurrency trading and is mostly used for hedging, speculating or taking a smaller risk while putting your funds in the exchange wallet.
Pros & Cons of Margin Trading:
1. Larger Return
Margin trading intensifies the profit amount which is exposed to trade. It can multiply the returns in a short time even with a small amount of fund.
2. Shorting benefits
When the price of cryptocurrencies are dropping there is an opportunity for short selling and buy back later when prices reach to lower level that will ultimately give good profit in falling market condition.
3. Structured Trades
If there is a facility of long as well as short trade, the account can be managed with the help of different kinds of strategies together to get a functional and profitable result in the overall time frame of the trade cycle. Generally, the fund managers are doing structured trades.
4. Larger Losses
Although, it gives the intensified profit while trading but it may bring greater loss also if the trade is in the wrong direction. Therefore, before using margin trading, one must be aware of its negative side as well.
5. Interest burden
It is an extra burden for the traders who have borrowed the crypto fund on interest basis which is generally higher than usual interest rates. The borrower is required to return the lender’s principal amount along with interest amount.
How to Get Started
1. Open Crypto trading account
The first thing to get started is to open a trading account in any of the cryptocurrency exchanges or with a broker. There is a small formality to fill up to get started and after complying with all the rules & regulations account will be opened.
2. Fund the account
Then, you need to transfer the amount that is intended for trading. The funds transferred to a designated wallet should be in the form of allowed currency. There is a proper channel through which fiat or permitted currencies get transferred.
3. Borrow the deficit amount
Now, you can ask for the amount that is required to place the orders. However, before borrowing the fund, you need to check the applicable interest rate which will incur on the borrowed amount.
4. Place the order
After getting the full and initial margin amount into your crypto trading account, you may place the order of any crypto pairs.
A trader may do the withdrawal or transfer of their funds in the same currency form that was used initially for deposit.
There are always two sides of a coin that is very true here in case of cryptocurrencies as well. When we talk about margin trading in cryptocurrency, there are huge returns on one side and accumulated losses on the other. Margin trading provides luring offer to the investors due to its short term cumulative returns. That explains the sudden shifting of traders towards cryptocurrency trading.