What Is Crypto Margin Trading?
Can it equal its immense popularity in the slow forex market in the fast crypto realm?
The popularity of margin trading can be found in forex markets with low volatility and slow market movement but is now hugely popular in the fast-moving crypto realm. Margin trading in the cryptocurrency market makes it possible for traders to borrow and inject capital into their account balance to increase its buying power and open choice positions that are far larger than what they presently have in their trading capital. Crypto margin trading is an allowable trading practice so that traders can expose themselves better against their choice asset by borrowing added capital from traders, exchanges, or the exchange itself. As opposed to regular or spot trading where you use your own capital to fund your trades, crypto margin trading enables you to multiply your capital to the desired amount through borrowing. In other words, you increase your leverage position in the trading bloc. That is why it is also called leverage trading where you can multiply the amount of your position by, say 100 times of leverage, exposing you to a potential profit by 100 times. Multiplying your leverage, however, can increase your risk. But that does not mean that if you can multiply your profits by 100 times, you may also end up owing in debt to an exchange by 100 times also, which is not usually the case.
The Workings of Crypto Margin Trading
To enter into the margin trade, you need to provide an initial capital prior to opening a position, called “initial margin,” and then hold a particular amount of deposit in your account to maintain a choice position called “maintenance margin.” Crypto exchanges differ in offering amounts of leverage. While some exchanges offer a 200-time leverage that would enable you to open a position 200 times the value of your initial deposit, others have limited amounts of leverage from 100 times down to 50 times or 20 times only. Different terms are also used from platform to platform. A 100X leverage in forex terminology is the same as the 100:1 leverage in crypto trading. The initial amount of capital you deposit is referred to as your collateral on the exchange. Exchanges impose different rules when margin trading according to your initial capital.
Short or Long?
Two choices are presented to you when opening a margin trading position. It is either you are going “long” or going “short”. You take a long position when you discern that the price of your choice digital asset is going to increase. Going short is anticipating that the asset price will drop, also known as “shorting.” Bear traders take profit from cryptocurrency prices that are decreasing in value. Whenever you have traded successfully by closing a position with profit, the exchange will release to you your collateral along with your profits. On the other hand, if you are losing, the exchange will close your trade and automatically liquidate your position. Similar to a stop-loss, a “liquidation price” is triggered when the speculated price reaches a particular threshold.
Of Margin Calls and Liquidation
Crypto exchanges that offer margin trading capital have their own rules of controlling and minimizing risks. Upon opening a trade and along the way the market is shifting in the opposite direction, the exchange will ask you to increase your collateral to keep your position. Otherwise, the exchange will automatically close your position. This is what they refer to as a ”margin call.” This happens when the asset value in a margin trade has fallen below a specific threshold. The funding exchange will notify you to increase your collateral to mitigate risks. The exchange, for its part, will likely liquidate your position when it has become too insecure to continue trading. It is called “liquidation level” or “liquidation price.” The exchange will automatically close your position so that only your collateral is lost.
Astute traders are taking advantage of margin trading as it gives them the opportunity to open very profitable positions far beyond accessibility that spot or normal trading can do. Think about a 100X leverage that can yield profit a hundred times over in contrast to a normal trade. Margin trading will also give you chances to profit from a bear market by going on a short position and closing it successfully to offset any loss that may be incurred by a price dip.
Crypto Margin trading is a high-risk yet high rewarding exercise. So as long as you understand the wild west nature of crypto markets, choosing the right crypto exchange that fits you, and carefully assessing your consequent profits and losses before opening a position, you are in for a life-changing trading practice.
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