In 2021, the trend of leveraged crypto margin trades has reached new heights. The prices of cryptocurrency were high in April which resulted in huge profits for traders. However, the price of cryptocurrencies dropped quickly and it was a completely new story.
No matter how trending the market is, or how skilled you are, leveraging money can be risky. It is important to learn all you can about margin trading and the risks associated with it.
What’s margin trading?
Margin trading involves trading on borrowed money. To get a loan, you will need collateral or margin first. This is a deposit that is managed by the exchange until you pay back the loan amount. You can then borrow multiples of the capital you have locked in, as per crypto exchange rules. It is the ratio between what you put in and what you take out that is called leverage.
The brokers must be contacted by traders to open leveraged trading on the market. Margin trading is much easier in the cryptocurrency market. The centralized and decentralized platforms that lend leverage can be used by anyone. This makes the process much simpler. Leverage trading offers higher potential profits, but also a greater chance of losing money.
What is margin trading?
Leveraged trading in Bitcoin or any other cryptocurrency allows traders to increase their profits by giving them the leverage of up to 100x. BitMEX offers trading with leverage for traders of different cryptocurrencies.
Margin trading positions can be divided into two categories. One is long, and one is short. A long trade is one where the trader purchases an asset at a low cost in the hopes of selling it for a higher price. The opposite is true for the short position. To purchase an asset at a lower price, a trader will buy it and then sell it.
Both cases result in the trader making a profit from any difference in the price for the crypto asset at the time of opening or closing any position.
Let’s look at an example to understand the concept:
You would only need $1,000 to invest $10,000 in Bitcoin or any other crypto asset at a leverage ratio of 1:10 and a margin of 10%.
Leveraged crypto trading requires you to invest $10,000. That’s quite a lot. Your profit margin will remain the same if Bitcoin prices rise.
To put it another way, leverage trading Bitcoin requires less capital upfront to make the same profit. It is important to remember that Bitcoin’s price could fall.
If you believe that Bitcoin will increase in value, You can benefit by opening a long position that has 10x leverage and a $1,000 margin. Your position will now be worth $10,000. Profits of $1,000 will be earned if the price of Bitcoin rises 10% (less any fees).
The ROE (return on equity) of the position, which is the difference between profit and margin, will be 100%. Your profit without leverage would be only $100 with an ROE of 10%. Cross Margin and Isolated Margin.
BitMEX uses two methods for margin trading:
- Cross Margin
- Isolated Margin
You can switch between the two on the exchange platform by changing the leverage slider in the “your position” box in the left-hand corner of your trading section.
Cross leverage can be used by moving the slider to your left. You may also use isolated leverage for numbers (2x, 3×3, 5x, etc.).
Remember that your position doesn’t automatically multiply if you use isolated leverage. The slider will adjust the amount of margin you can use once you move it. You will need to
You can manually change the quantity.
Let’s look at an example to understand it:
Imagine that you have $1000 in your trading account and that you adjust the slider to 3x so you can trade with $3000.
Cross margin is different. You don’t have to worry about moving your slider. The slider will automatically use all funds in your account. Cross margin example: Let’s say your account has $1000 and you wish to use 3X leverage. Simply enter $3000 in the quantity box and your account will automatically be set to 3X leverage. You can also input $5,000 to get 5X leverage.
Cross margin eliminates the need to manually enter the leverage. If you don’t want to use all of your balance, you might consider an isolated margin.
Liquidation
Profits are what we all want! Isn’t it? What if the market goes in the opposite direction to what you expect?
If the situation becomes tense and you are near to losing your ability to repay the loan, the exchange will protect your money. This means liquidating.
The exchange will then automatically sell any or all of your positions to make sure that the entire margin is repaid. Let’s take an example. Imagine you have $10000 in a long position. You are using 10x leverage. The asset’s price plunges 10%. If the asset’s price falls below the margin, this would mean that you are losing $1000. It’s not your money anymore, but it is exchange money. The liquidation mechanism is here. The exchange will close your long position before you run out of margin. It sells the asset at market price to recoup the loan and liquidation fee.
Leverage is a measure of how close the liquidation price will come to the market price. It is recommended that you do not open any positions with leverage greater than 5x.
Is margin trading worthwhile?
A trader looking to increase their purchasing power quickly can use margin trading. If done correctly, it can help you purchase larger stocks and may even give you a better ROI. If you do it wrong, it could spell disaster. Margin trading is associated with the following risks:
- Higher than normal losses proportionally to the leveraged amount
- Short selling can lead to unlimited losses
- Liquidation has a higher chance of total loss
Margin trading involves risk management. You should allocate a small portion of your capital to different trading pairs. You should also consider the place you want to stop losing before opening any positions. Margin trading strategies
Here are some popular margin trading strategies you might consider:
- Gradually increase trade size
- Demo trading allows you to practice trading
- Divide your position
- Set your goals and reduce risks
- To limit price drops, limit trade time.