Margin Trading? What is its definition? And is the margin trading of the stock market similar to margin trading in cryptocurrencies? If not, then how is it different from regular margin trading? Does it enclose threats, or is it risk-free? What are the different persons involved in margin trading? What are the various benefits these persons get from margin trading? Everything will get answered in the article below.
1. Margin trading in cryptocurrencies
At first, we will discuss what margin trading, which gets observed in the stock markets, is, and then we will move on with crypto margin trading. Margin trading is defined as a relatively simple process that allows investors to buy a more significant number of stocks or share higher than their affordable value.
This trading method involves buying and selling securities in a single season. So in case you are a person who wants to make money out of stocks fast, then margin trading would be the right option for you. Even brokerages for this type of trading have relaxed adequately to the advent of time duration over the years.
Margin trading is a process that requires the investor to predict or speculate the stock movement at a particular time or season. Simply put, a margin trading account allows you to buy more shares or stocks. These stocks can be brought at any point time in the future.
Now, let us come to the other part of trading: crypto margin trading. Crypto margin trading, or margin trading in cryptocurrencies, is a process that provides access to a trader to open a position without any leverage. So, for example, imagine you have opened a margin position that offers you a 3X advantage.
Your assets or stocks have increased by a range of 20%. But here, your position will earn 60% because of 3X leverage. So this is the main difference between standard trading and margin trading, wherein standard trading trades get traded with a leverage of 1:1.
Margin trading in cryptocurrencies is possible only due to the presence of the lending market in the cryptocurrency sector. How is the lending market viable for this? The lending market consists of lenders who provide massive loans to traders. These traders invest the same loans provided on a more substantial amount of digital currencies.
But how does this lending concept help the lenders? These lenders make many profits from the interests, which benefit once the loan repayment starts from the trader. Margin trading in cryptocurrencies has been a clear-cut feature that has been purely possible due to the advent of time and technology in cryptocurrencies.
2. What does a trader do in margin trading?
If you are a trader, one of the margin tradings gets initiated, and you will be required to commit or mention a percentage of the total order value. Here, the initial investment gets called the margin, and it is close to the concept of leverage.
But what is this leverage concept? So if you plan to open a trade at 50,000 US dollars at trading leverage of 5:1, you have to commit 5,000 US dollars of your capital. In cryptocurrency markets, the leverage ratios usually range from 2:1 to 100:1
So, if you are interested in investing in digital currencies, the limited capital problem does not allow you to do so. Margin trading is the best tool you can consider. By margin trading, you can borrow money from cryptocurrency exchanges or from a broker who will, in turn, increase your buying power ability.
A trader will enjoy higher profits if he uses margin trading as an option under such circumstances. But yes, it has its share of risks, and you must trade accurately and correctly to enjoy higher profits.
But a trader must also see that he is not a U.S citizen, as most U.S citizens are getting banned from using this platform. But what are the threats? In brief, we can tell that a trader will experience high profits only if the market goes in his favor, or he will be doomed.
There are two options for a trader when he opts for margin trading. They are:
2.1 Opening or Entering a long position: This option is for those planning to buy digital currency with the sole option that its price will rise in the coming days. Their primary aim will be to use the leverage concept to a maximum level and get benefitted from it in case the price rise they predicted happens in the market.
2.2 Opening or Entering a short position: This option is for those who are planning to sell their digital currency by predicting the fall of its price. The primary aim of a trader here would be to buy the digital currency once there is a fall in its price and profit from it again when the prices soar high.
But before venturing into margin trading, you have to take care of two crucial steps in mind. They are:
2.2.1 You have to maintain the minimum margin value throughout your whole sessions. This attribute is required as on a very volatile day, the prices may go down more than you had predicted.
2.2.2 If the minimum value is not maintained, then the broker has all the rights to ask for more deposits of additional funds in the account. This feature gets called as the margin call.
3. What is the role of a broker in margin trading?
The broker is a third party who helps you efficiently with your trading options. A broker assists you in finding the perfect lender, depending on your capital and trading abilities. In digital markets, brokers get easily observed on the crypto exchanges, which help you buy or sell your digital currencies.
Of course, they extract a few additional fees to extend their services. The prominent role in margin trading is to find the right exchange, which can help you with your trading. Always choose the correct exchange depending on its ability to provide you with a trustable and reputable broker.
A point has to note here is that trustable and reputable brokers should efficiently provide you the leverage of all kinds. There are exchanges in the cryptocurrency with lucrative offers and attractive features.
But these are not important as being a trader; you should always look out for differences, merits, and demerits of each cryptocurrency exchange and then make the right choice.
So, essentially a broker here helps you lend his digital money and expects it back in the form of interest. This attribute is not the only thing that a broker does. He also helps you in placing your request to open a trading account.
Cryptocurrency exchanges or brokers allow traders to earn interest by themselves. How can they make interest by themselves? Traders can earn interest on their holdings by loaning their assets to other currency users.
Buyers will place their orders and specify the maximum interest they are ready to pay. If the trader agrees with those terms, they can proceed with the transaction. This type of trading is called peer-to-peer trading. So the brokers not only help with the trading options but will also help the traders immaculate some funds.
4. What are the risks involved in margin trading?
It is true that under margin trading, any trader can amplify his profits to higher risks. But there are also some risks in the margin trading sector, which are worth to be mentioned. They are:
4.1 Margin trading can amplify your losses as it increases your gains. The most significant risk of using margin trading is that it can provide you with huge losses. Only if you are wrong in your judgment of predicting the prices.
This attribute is why everyone tells you to be careful before foraying into margin trading. You might lose your entire account balance if your prediction goes wrong.
4.2 You have to maintain a minimum account balance in your trading account. If your prediction goes wrong and you lose your balance in the account completely, then you have to refill it again. This time with new deposits and funds, start with your trading again.
4.3 The digital currency you borrow from a lender to fund your account is not available freely. You have to pay due interest for the amount you borrow and repay the whole amount once your trading operation is satisfactorily completed. This factor is the reason why most of them advise traders to pay heed to the platform fees.
5. Who should opt for margin trading, and what are other trading options?
People who want to double or triple their trade margin can easily opt for margin trading. Beginners may find margin trading to be a bit complex. But with time, they will surely find a way to trade under margin trading effectively. And any trader must have an aggressive trading strategy whenever he uses margin trading.
As we have already discussed, a correct move may end up with millions as profit, and a wrong move, on the other hand, may end up with millions as losses. So any trader must be cautious with his judgment and accurately predict the rise and fall of prices of these digital currencies.
It is a known secret that investors or traders who properly manage their trading options and strategies have substantially earned more profits. They have also been the straight winners in the cryptocurrency markets.
Most of them have become losers in the same area without proper management. So, a safer way to try margin trading is to start small and then move up the ante.
Cryptocurrency options are financial methods that allow the trader to predict the prices of digital currency in the future and place a bet on them. They give the holder of digital currency a right but not an obligation to buy or sell their assets on a pre-determined date in the future.
These options also depend on the type of options contract the user chooses. They will give them exceptional opportunities to buy or sell their digital currency at a given value. This assigned value is known as the strike price, which gets specified for a specific period.
There are two basic types of cryptocurrency options other than margin trading and get called “call’’ and “put” options. The call option holder is privileged with an opportunity to buy an asset at a fixed price within a specific time window. Put option holders have the same opportunity to sell their assets at a fixed price within the same specified time window.
6. Which are the exchanges that allow margin trading?
Some of the first crypto exchanges which are available in the digital currency market are:
So, the bottom line here is that:
Margin trading is a useful cryptocurrency invention and can be profitable if used correctly. Similarly, if its use does not get utilized properly, it can give you some nightmares.
But it is truly an excellent tool for people who dream of acquiring more assets within a limited capital and a lesser amount of time. But before foraying into it, it is better to understand it properly and then forward to invest in digital currencies through it.
Though it acquires some fees, the profit you will enjoy because it will be more massive. So, start slowly in the race and pick up your speed once you are a pro.