What Is Margin Trading
is another form of trade that is more similar to performance speculation of an asset. Similar to spot trading, margin trading involves trading an asset such as Bitcoin and hinges on the use of borrowed funds to further capitalize on the future price movements of an underlying asset.
Since margin accounts allow users to borrow funds from a third party, these users have the potential to win or lose much higher amounts of capital through leverage. The borrowed funds are provided by other traders who earn interest based on market demand for margin funds.
To initiate a margin trade, the investor must commit some collateral, which is known as the margin. So if a trader wanted to open a margin trade at a leverage ratio of 10:1 for $10,000, the trader would need to invest $1,000 as collateral.
Taxes On Crypto Derivatives Trading
Because of the complicated tax environment surrounding derivatives as explained earlier, the conservative approach for traders is to report all gains and losses from cryptocurrency trading as capital gains. The same calculation methods already discussed for margin trading are also applicable for derivatives trading such as futures contracts. This means that you need to calculate the gain/loss arising from each closed position and report this as capital gains on your tax return.
Bitcoin As An Asset Is Risky
Price is just one of several risks you will have to evaluate while shorting the cryptocurrency. As compared to other, more established assets, Bitcoin is nascent. It has been around for only 13 years. Therefore, there isn’t sufficient data or information for investors to make an educated decision about its workings or feasibility as an asset. For example, several issues related to Bitcoin forks are still unresolved. While established platforms like CME are safer and guarantee execution for Bitcoin derivatives, new platforms started off being “clunky” and are susceptible to hacks.
Also Check: How To Make Your Own Crypto
How Does Bitcoin Margin Trading Work
In most cases, the exchange provides loans to the traders so they can enlarge their capital to be used for margin trading. This way, traders can open positions with high leverage. The exchange doesnt have many risks since every position has its liquidation price, which is based on the level of leverage.
Day Trading And Scalping
A crypto day trading strategy allows the trader to take full advantage of cryptocurrency assets price volatility. As mentioned earlier, virtual assets are currently extremely volatile, which works to the advantage of a day trader.
The day trading strategy is a game of numbers strategy. A day trader will make multiple trades within a day, buying low and selling high within little gains that compound to large sums by the end of the day. Typically, sometimes it gets hard to perform this manually. To succeed in this strategy, you will need to consider automating your trades using trading applications or crypto trading bots like Coinrule.
Please note: It is not recommended that you begin your trading journey as a day trader. This is because this strategys fast-paced nature will require that you make fast decisions, and there is little room for research between trades.
Scalping is a part of day trading but typically involves concise trading periods. Think minutes.
When either day trading or scalping, many trades will result in both wins and losses. The idea is to make sure that the win/loss ratio is in your favor. Score more wins to consider your strategy a success.
Read Also: How To Buy Into Cryptocurrency
What Is Bitmex Isolated And Cross
Lets assume youre using an isolated margin and have 100 USDT in your account. Hypothetically, let the price of BTC be 10,000 USDT. Now you open a position worth 5 USDT, and the exchange has a liquidation price of 9,500 USDT.
The price falls to 9,000 USDT, and all of your 5 USDT undergo liquidation. However, there will be no deductions from your main balance. Now, if you would have been using cross margin, then you wouldve suffered a higher loss, but you wouldnt have suffered liquidation.
How Margin Trading Cryptocurrency Works Leveraging
The with introduction covered, lets cover some of what we touched on above in detail.
With margin trading you can, for a theoretical example, buy $10,000 worth of bitcoin with only $5,000 .
You put down your $5,000, you borrow the other $5,000 from a lender automagically , and then when you sell you may-or-may-not pay a fee .
With that said, because you are borrowing money, you owe the money back along with any applicable fees, no matter what.
That means if you bet on cryptocurrency going up, and it goes down or stagnates, and you have to sit on your position, youll rack up interest in cases where interest is charged. That also means, if it goes down, youll owe what you borrowed plus any fees even though you lost money.
Given the above, it is typically smart to use stops. In fact, there are hefty fees for liquidations on most exchanges, so in general, it makes more sense to be stopped out of a position than to sit in one for a long time or to let yourself be liquidated!
TIP: You can leverage short or long. When you short you bet on the price going down . When you go long, you bet on the price going up . The amount you lose is based on your total bid size, so make sure to use risk management. The position doesnt close until you close the position manually or at a set price or the exchange calls your position in because you run out of funds allotted to the position .
Don’t Miss: How Long Does It Take For Bitcoin To Transfer
How To Get Started With Margin Trading On Binance
Under your account balance information, youll find exchange and margin details click on .
After carefully reading the margin account agreement, select I understand.
Then, you will be able to transfer funds into your new Margin Trading Wallet. For example, you can transfer BTC, ETH, and BNB from their Exchange Wallet to their Margin Wallet. These funds will act as collateral to any borrowed funds incorporated in a margin trade and determine how much you can borrow .
If your margin level decreases, you either need to increase your collateral or reduce your loan. A margin level of 1.1 will automatically be liquidated, or in other words, Binance will sell the funds at market price to repay the loan.
For in-depth instructions and to learn how to repay debts owed, please see our Academy article on Binance Margin Trading Guide.
Should You Margin Trade With Cryptocurrency
- If you have just begun margin trading in cryptocurrency, begin with small leverages. A 2X or 3X leverage is good enough to start with, as it reduces the risk of liquidation. Always ensure that your initial deposit is what you can afford to lose.
- Always set a stop-loss to prevent liquidation. That way, you will only lose a part of your initial deposit if the trade does not go the way you had planned.
- Do not treat margin trading in cryptocurrency as a passive investment. You always have to monitor your positions because an unexpected turn can cause you significant losses. Therefore, you must be prepared to react if the trade does not go according to your plan.
- Do not rush to buy any assets that are growing rapidly. It can be a pump-and-dump scheme where the market participant is manipulating the rate as they have limited assets to liquidate. The value will fall as quickly as it has risen, and you will suffer significant losses.
You May also be Interested In:
Also Check: How Long Has Cryptocurrency Been Around
Differences Between The Stock Markets And Crypto Markets
- Owing to its old age, the stock market is more stable and less volatile. The crypto market, on the other hand, is accustomed to wild price swings. It is pretty normal to see double-digit percentage swings in a matter of hours.
- . Age is a significant factor in trading. The stock market has been around for a long time, while the crypto market is only about a decade old. This means that market value and trade volume in the former is much larger compared to the latter. The younger age also contributes to the wild volatility experienced in the crypto market.
- . In the stock market, you invest in the publicly listed company shares by buying their stocks. In the crypto market, you invest in the idea, the technology, or the currency , but not the company behind the currency.
- Regulations. Since the stock market has been around for ages, regulators have had enough time to develop and implement rules and regulations governing the markets conduct. This contributes to the minimal volatility we highlighted earlier. In the cryptocurrency market, this is not the case. The regulators are still grappling with understanding the emerging asset class, and this lack of regulations are part of the reason for the markets wild nature.
Financial Trading Regulations In The United States
First of all, one has to know the background of the US American regulations in the area of trading with financial products and derivatives. The US have their own system here. In principle, there are two regulators in the States that regulate foreign exchange trading. First of all that would be the CFT Commodity Futures Trading Commission¹. This institution has been in existence since the 1970s with the mandate to oversee the options and futures markets.
Parallel to the CFT, there is also the NFA National Futures Association² which is responsible in particular for derivatives trading. To a certain extent, both authorities work together. The NFA sets the rules for Forex, Futures and SWAP trading and decides which derivatives may be traded with which leverage. Here the maximum leverage for Forex, Futures and all other Derivatives is determined.
Every broker who wishes to operate officially in the USA must be a member of the National Futures Association. This is exactly the case with the large traditional Forex and Stock trading platforms. As mentioned earlier above, CFDs are entirely prohibited in the USA at the moment.
Also Check: Where Can You Pay With Cryptocurrency
Crypto Margin Trading For Beginners
Most likely, youve already learned the basics of crypto trading, and are even pretty good at it! If you dont have an enormous bankroll at your disposal, then you may be wondering where to get capital for trading.
Theres actually a process in place for that, and its called cryptocurrency margin trading. In this article, well go over everything you need to know to begin trading on margin. Well also cover the dangers of it and what you need to know to protect yourself.
Drawbacks Of Margin Trading:
The cons: The greatest con is also the same. Losses made on margin can also be magnified. When you sell your securities held in a margin account, any profits will first go towards paying back the loan to your broker, meaning you may not get your initial margin back if you made a loss. As with any loan, interest is charged that can accrue over time, making margin trading more suitable for short term investments.
Read Also: What Does Cryptocurrency Market Cap Mean
Understanding Margin Calls & Liquidation
When you borrow money from an exchange in order to margin trade Bitcoin, the exchange that provides the capital keeps a number of controls in place in order to lower their risk. If you open a trade and the market moves against you, it may happen that the exchange will ask for more collateral in order to secure your position or forcibly close the position.
When this occurs, your exchange is likely to hit you with a so called margin call. A margin call occurs when the value of the asset in a margin trade falls below a certain point. The exchange that funds the margin trade will ask for more funds from the trader in order to lower their risk. Most exchanges will notify traders via email, but its important to actively monitor your margin levels.
If the margin level of a position becomes too insecure, an exchange is likely to close the position this is referred to as the margin liquidation level, or liquidation price. Liquidation occurs when an exchange automatically closes a position in order to ensure the only capital lost is the capital deposited by the trader that opened the position.
Lets suppose a trader opens a 2:1 long position when the price of Bitcoin is $10,000. The cost of the position is $10,000, but the trader has borrowed an additional $10,000 from the exchange. The liquidation price of the position is therefore $5,000 at this price level, the trader has lost their initial $10,000 collateral and is thus liquidated by the exchange.
Trading On Margin With Cryptocurrencies
Most traditional brokerages do not list cryptocurrency trading, much less margin trading, among their service offerings. The volatility associated with cryptocurrencies has mostly dissuaded individual traders from placing large bets using margin trading capital. According to reports, 70% of all current cryptocurrency trades are conducted through API calls by institutional investors. In lieu of brokerages, cryptocurrency exchanges have emerged as popular venues for trading on margin, but not all exchanges offer the service.
Of the exchanges that do offer trading on margin, the leverage amounts and interest rates for margin trades differ based on customer demand and regulatory differences across distinct geographical locations. Some European-based exchanges offer leverage up to 125 times for certain futures contracts. The interest rates on margin loans at various exchanges also differ. Some charge an annualized interest rate for a loan while others calculate the loan rate on an hourly basis.
Read Also: How To Hack Bitcoin Wallet Using Kali Linux
Requirements For Crypto Trading
To start trading Crypto currencies you will need a Crypto Wallet and a trading platform. Once everything is set up and the account has been successfully verified, it is as simple as filling out a form and waiting for the transaction to be processed.
In other words, if you want to trade cryptocurrencies on margin, you need:
- A wallet device for cryptocurrencies
- Access to a exchange platform for cryptocurrency trading
Tip #: Do You Even Need Margin To Trade Cryptocurrency
Since borrowed capital comes at a cost, many investors or traders can avoid unnecessary fees if they dont need access to margin or leverage in the first place.
If someone wants to sell part of their stock portfolio to gain exposure to a portfolio of cryptocurrency, there isnt much of a need for margin.
Recommended Reading: How To Create My Own Cryptocurrency
Crypto Margin Trading Platforms In The Usa
This does not mean, however, that it is not possible to trade crypto currencies with slightly increased profit potential in the USA. There are a few platforms that have the appropriate licenses to offer crypto trade with a slight leverage in the US, at least in a part of the US states. On these platforms, the underlying asset, especially Bitcoin, is physically traded despite a certain amount of leverage offered. So they are not CFDs, but actual Bitcoin purchases and sales.
How Does Margin Trading Work
Let assume you decide to buy $10,000 worth of an asset. You proceeded to pay $5,000 in cash and borrow, buy on margin, the other $5,000. If your investment grows by 25% to $12,500. With your cash outflow at only $5,000, your actual return on investment would be 50%.
The example above would seem quite easy to comprehend, but you must understand that margin trading increases losses just as it increases profit. For instance, if a $10,000 investment decreased by 25% to $7,500, 50% would have been lost on the trade.
It is worth mentioning that margin lending funds are not entirely free, and like other loans, margin loans are charged interest. Margin rates are generally lower than the annual percentage rates of personal loans and credit cards, though, and there is typically no set repayment timetable.
Since margin positions are often held for relatively short periods of time, interest charges are typically reasonable. However, the longer your margin loan remains unpaid, the more youll want to consider how interest costs could impact your returns.
Don’t Miss: What Is Blockchain Stock Symbol
How To Start Margin Trading Cryptocurrency
can be a hugely profitable tool when used correctly. However, it can easily catch out inexperienced traders who jump into it without any prior knowledge.
It takes time to learn the craft. Margin trading should not be undertaken without a solid understanding of the fundamentals, along with risk management.
In this post, well dive into the nuts and bolts of margin trading, how to properly use leverage, and how to implement margin trading into your overall trading strategy.
Spot trading vs margin trading
Liquid supports two forms of crypto trading: spot trading and margin trading. Spot trading only allows traders to buy and sell self-owned assets. If youre looking to buy the QASH for BTC, you must have BTC in your exchange wallet.
Similarly, if you want to sell QASH for BTC, you must have QASH. Unlike spot trading, margin trading does not require you to own the assets you wish to trade. Instead, you can deposit funds to your margin wallet to be held as collateral.
With this margin, you can borrow assets from lenders to trade with. For example, depositing USD500 to your margin account allows you to open a USD500 BTC/JPY position without actually owning any JPY or BTC.
The relationship between margin and leverage
Advantages of margin trading
The main advantages of margin trading are increasing buying power through leverage, trading assets you dont directly own and the ability to short assets. We already covered the first two advantages, so lets talk about shorting.