What is margin trading in cryptocurrencies?

3 min read | June 24, 2021 06:44 AM EDT | By Raza Naqvi

What is margin trading in cryptocurrencies? — Image source: Pixabay.com

What exactly is crypto margin trading?

Cryptocurrencies can be quite expensive, and not every crypto enthusiast can afford to buy them out of their own pocket. Margin trading comes into the picture when a trader opts to borrow money to increase their buying power. In other words, an investor can choose to invest in crypto using funds offered by a third party, often called margin lenders.

Much like margin trading in traditional markets, margin trading in crypto also allows a trader to make profits. However, there is a substantial risk associated with it. An unlucky trade could make the crypto investor liable for the total loss.

In this type of cryptocurrency trading, a trader needs to make an initial deposit before opening a position in crypto. This is where leverage trading comes in, a concept that is interrelated to margin trading.

Under leverage trading, a trader's buying power increases as they open more significant positions than the money in the trader's account.

Generally, leverages are described in ratios, like 1:10 or 1:20. For example, if you plan to invest C$ 10,000 in a crypto asset with a leverage ratio of 1:10, you will have to put in only C$ 1,000 from your pocket as the rest will be borrowed money.

Margin trading vs leverage trading

In simple words, the margin that a trader commits is a percentage of the total value of the order. When a margin trading exchange lends a certain amount, the borrower will need to pay back the entire amount plus interest on the borrowed money.

A leverage, on the other hand, is the loaned amount that a trader uses to make up for the difference between the margin and total value of the order.

Advantages and disadvantages of margin trading in cryptocurrencies

The most notable advantage of margin trading is that it can help a trader make larger profits on less capital investment.

Under margin trading, there is a chance of amplifying a single trade by as much as 100x in some instances. This means that if a trader makes the right call, their profit could be 100 times bigger.

Its disadvantages are just as substantial as its pros. In margin trading, losses can be just as magnified as its profits.

The above constitutes a preliminary view, and any interest in stocks should be evaluated further from an investment point of view.

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