For traders with a limited amount of crypto resources, that is, bitcoins and altcoins, there is the possibility of margin trading. This method allows you to increase the amount invested in assets without actually owning them.
It is important to note that margin trading is not recommended for everyone, as such investments are subject to great risk.
So let's begin: what is margin trading?
Margin trading allows a trader to make investments using borrowed funds. For example, we opened a margin position with 2X leverage. Our underlying assets are up 10%. It turns out that the position yielded 20% due to double leverage. Standard trades are made using 1:1 leverage.
Margin trading is possible thanks to the credit market. Lenders provide loans to traders so that they can invest in more currencies, and the lenders benefit from the interest on the loans.
On some exchanges, such as Poloniex, users provide loans for margin markets, while on others they make direct exchanges. On Poloniex, anyone can lend their bitcoins or altcoins and benefit from interest on the loan.
The main disadvantage of such services is that coins must be stored in wallets on exchangers, and this is less secure than storing them in a cold wallet.
Costs and Risks of Margin Trading
As mentioned above, the cost of a margin position includes payment of interest on loans (to exchangers or other users) and commissions for opening a position on the exchange.
As the chances of earning money increase, the risks also increase. The maximum you can lose is the amount you invested to open the position. This level is called salvage value.
Liquidation value is the value at which the exchange automatically closes the position so that you do not lose any of the borrowed coins - only your own money.
Example: if we are talking about classic trading with 1:1 leverage, then the liquidation level will be reached when the position equals zero. As leverage increases, the liquidity value will move closer to our buying price.
For example, Bitcoin value is 1000 USD, we bought one Bitcoin (long) with 2:1 leverage. Our position is worth $1,000, and we also borrowed $1,000. The liquidation value of our position will be just over $500 because at this level we lose our original $1,000 plus interest and fees.
Margin trading is possible against the market, and we can also use short positions with leverage.
Manage Risks – When trading on margin, it is important that you have clear risk management policies in place. Beware of excessive greed. Calculate the amount you are willing to risk.
Remember that you may lose all your invested money. Set clear levels for closing positions, taking profit or stop loss.
Pay close attention - cryptocurrencies are considered highly volatile assets. And margin trading doubles the risk. Therefore, try to open short-term trading positions with leverage.
Keep in mind that the daily fees or margin position are negligible, but in the long run these fees add up to a decent amount.
Extreme movements. Cryptocurrency trading involves extreme fluctuations that occur in both directions (“Depths”).
The risk is that the depth may affect our salvage value. This is especially dangerous for traders with high leverage and low levels of their own investments.
But you can take advantage of these depths and try to set a limit for closing the position - perhaps the depth will go the other way and you will make a good profit.
Exchanges for margin trading
Now margin trading is possible on almost all exchangers. Its advantages are obvious, but it is important for every user to be confident in the security of their finances. Traders strive to minimize the number of coins located on exchanges.
Exchanges are considered ideal targets for hackers, with several major hacks occurring in recent years, with Bitfinix being the latest significant victim (in 2016). Then the attackers stole a third of the exchange’s bitcoins.
Margin trading allows us to open larger positions without having to purchase bitcoins, so we can store fewer coins on the exchange.
For example, if our portfolio consists of five bitcoins, and we want to hedge the risks of a fall in the exchange rate, we can open a 10X leverage position - this will be equivalent to 40% of our portfolio.
To open a position, only a tenth of it is required (10-fold leverage). It turns out that we only need 0.2 bitcoins. And the rest of the money is stored in reliable cold wallets.
Bitmex– Bitmex in a short time has gained a reputation as one of best exchanges, most traders trade on it (including us). The exchange supports margin trading with 100X leverage, you can choose either long or short.
The service is very easy to use and has good support. Follow this link and get a 10% discount for your first six months.
Plus500 is a world famous Forex trading company. The site supports the use of Bitcoin and all major altcoins for margin trading (Ethereum, Ripple, Litecoin, Bitcoin Cash and others).
The main advantage of the exchange is that this service is fully regulated by the company, there is 24/7 support and commitment to millions of customers.
You can't invest Bitcoin right now, but once you sign up, you'll be able to start margin trading immediately via deposit or bank transfer.
Margin leverage can be set up to 1:20, the exchange facilitates a smooth entry into trading thanks to a free demo account. To get started with Plus500, you can study the video guides.
Bitfinex coordinates the largest Bitcoin dollar trading flow, with margins reaching up to 3.3X leverage. The site has a very user-friendly interface, all actions are performed intuitively.
Poloniex– the largest cryptocurrency exchange. There is support for eleven altcoins, but there is no possibility of margin trading BTC-USD. Leverage is only available up to 2.5X. Relatively high interest rates when shorting.
AVAtrade is another world-famous CFD exchanger that allows you to trade Bitcoin CFDs, as well as other cryptocurrencies. The company is fully regulated and Plus500 has a free demo account. Link to official website:
When someone talks about the stock exchange, people far from financial markets immediately have images in their heads of many people calling on the phone, negotiating deals, multimillion-dollar contracts and other “movie” attributes.
Once upon a time this was really the case, people traded in the halls, shouted out prices, called their clients. But now everything has moved to the Internet, and it has become much more convenient.
An exchange is a trading terminal on a computer, with a huge set of data and tools for analysis. Exchanges differ in the goods that are sold and bought on them: securities, raw materials, currency, contracts, etc. Cryptocurrency, as a new phenomenon in the financial world, also required exchanges to regulate trading. This is how the first cryptocurrency exchanges appeared.
Now there are only two options for withdrawing cryptocurrency: the exchange and exchangers. Their main difference is that when trading on the stock exchange, you make a transaction with the same other person or company that stands behind him. When working with exchangers, you work directly with the company, and it provides you with an exchange in return for some kind of fee - a commission.
The commission when working with the exchange is much lower than in exchange offices. Another advantage of the exchange is that it instantly reacts to any changes in the price of cryptocurrency, constantly updating information about rates.
Essentially cryptocurrency exchange is a huge online platform where users from all over the world exchange virtual crypts for virtual currencies around the world.
Now let's move on to a review of the exchanges that are most popular around the world.
Rating of the Top 7 best cryptocurrency exchanges
Here we have collected 7 official exchanges for you.
Bittrex
Bitrix – one of the largest exchanges where cryptocurrency trading is carried out. It has been operating since 2015 and since then has firmly occupied one of the leading positions. Stable operation of sites, absence of overloads, relative reliability - this is what you will deal with on Bitrix.
As for currency pairs, there are 260 of them. Not as many as it could be, but all the popular cryptocurrencies and fiat money are collected there.
Pros:
- Commission for completed transactions is 0.25%.
- A large number of trading pairs.
- Convenient trading tools.
- Stability of the site.
The downside is that there is no Russian language, which may be critical for Russian-speaking users.
Exmo
An interesting exchange that is good for its security and support service. Conditions for the whole world are stable, but the presence of the Russian language makes it attractive specifically for audiences from the CIS.
Pros:
- Safety.
- Excellent support service.
- Constant expansion of currency pairs.
- Commission 0.2%.
And at Eksmo there is the opportunity to work with the ruble and popular Russian payment systems like Webmoney and Yandex.Money. This is one of the best exchanges in Russian.
Poloniex
Polonix– the second largest cryptocurrency exchange. Now it ranks first in popularity among ordinary traders and is not going to lose ground.
Pros:
- More than 60 tokens that appear almost instantly after entering the market.
- Great popularity.
- Small difference between purchase and sale prices.
Polonix is one of the most interesting and attractive platforms for beginners and experienced traders. It is best to engage in either margin trading or work with altcoins.
Yobit
An exchange with a simple interface and minimalistic design. You won't find anything unnecessary. But this does not prevent the company from occupying a leading position in the tools it provides for analyzing chart behavior.
Pros:
- 400 cryptocurrency pairs.
- Small commission.
- Instant withdrawal.
This is another exchange for the Russian-speaking audience. The Russian language and support for payment systems popular in the CIS make it a good place to sell cryptocurrency.
Bitfinex
An exchange that is ideal for those who do not want to go through identification and withdrawal huge amount cryptocurrencies without restrictions. It ranks in the TOP 5 in terms of trade turnover. 35 currency pairs are traded.
Pros:
- No restrictions on withdrawal.
- Commission less than 0.20%.
- Reliability and pleasant interface.
Kraken
An interesting exchange, with one of the highest security systems. This is one of those old and reliable comrades who have been in the game almost from the very beginning of the cryptocurrency.
Pros:
- Reliability.
- High degree of protection.
- Possibility to receive funds via direct bank transfer.
Nova
Nova was once one of the most interesting cryptocurrency exchanges. Reliability, a large number of currency pairs and friendliness towards beginners were valued first and foremost. But starting this fall, the exchange is gradually ceasing operations, planning to stop trading in February 2018. Therefore, if you have savings left there in BTC or Ether, it is better to withdraw them.
Which exchange to trade cryptocurrency on?
In order to choose the exchange on which you will trade, it is enough to decide on your goals. What currency do you have? Why do you want to buy/sell your assets?
Money does not need to be kept in one basket, this is a well-known fact. Choose the main trading platform where you will store 65-70% of your capital. Then choose 2-3 spare ones and distribute the leftovers among them.
As practice says, such precaution will not be superfluous. In 2011, it began to rise and gain momentum, and if not for one unpleasant circumstance, now it was probably worth all of 20-30 thousand dollars.
We are talking about the hacking of one of the largest exchanges in 2011. Mt Gox suffered a cyber attack, was hacked, and hundreds of thousands of bitcoins were stolen from users' accounts, which the company was unable to replace. The exchange's rating was lost and it went bankrupt.
And also, relatively recently, in 2016, the giant BitFinex suffered a cyber attack when attackers stole more than 100,000 bitcoins. These events show that distributing assets among cryptocurrency exchanges is now one of the most important protections. After all, currency and commodity exchanges have protection that far exceeds the successes of current hackers, but about crypto and their trading platforms This cannot be said yet.
Now let's move on to more specific information. Let's try to figure out what tasks exchanges are suitable for.
If you are going to invest large sums in popular cryptocurrencies like Bitcoin, Ether, Litecoin and others, Bitfinex, Polonix, Bitrix will help you. If you just want to sell the mined assets with minimal losses - Bitrix. If you work with altcoins and are trying to grab a “tasty” coin that will increase in price over time, pay attention to Polonix and Bitrix.
If you have other needs, ask questions in the comments and we will find the right exchange for you.
What operations take place on the cryptocurrency exchange
In addition to standard purchase and sale, most exchanges allow trading participants to perform the following operations:
- Futures contracts.
- Option contracts.
- Margin trading of cryptocurrency on the exchange.
There is not yet the variety of operations that exist on real exchanges. But maybe it's not necessary. Let's talk more about contracts and margin trading.
Futures – a contract that is entered into for the future. That is, today you enter into a contract that the day after tomorrow you will buy a thousand rubles at a price of 20 dollars. Regardless of how much a dollar will cost the day after tomorrow, you are obliged to buy 1000 rubles at a price of 20 dollars.
Option - the same contract. Only at the conclusion of it is it indicated that the trader can EXERCISE THE RIGHT to buy an asset at that price. That is, he may use it, or he may not.
Margin trading – combining own and borrowed funds in order to maximize profits. That is, roughly speaking, this is a small loan that is given to a trader to complete a transaction. The trader makes a profit, takes it for himself, and returns the loan with interest. It's simple.
This small list of operations opens up access to a truly diverse approach to making money on the stock exchange.
How to make money on the cryptocurrency exchange
You can make money on the cryptocurrency exchange not only by selling the cryptocurrencies obtained as a result of mining.
Intraday trading of cryptocurrency on the stock exchange is the most promising way to make money. Your task is to buy low and sell high. Or borrow cryptocurrency while it is expensive, sell it and return it when it becomes cheaper. But this is only simple in words; in reality you will have to face a large number of pitfalls.
The simplest and most conservative way is. You take an asset, transfer it to your wallet and wait for it to grow. You can see for yourself how quickly the value of the entire cryptocurrency is growing, so it would be stupid not to invest money in it.
Some exchanges also offer their members to be lenders. Since exchanges rarely want to invest own funds for trading of their clients, they provide the opportunity to invest margin trading to ordinary users. By lending money, you won’t be able to earn that much, but you can never “dismiss” this option as a way to earn money.
What you need to know before you start making money on the cryptocurrency exchange
Making money on the stock exchange in general is a very difficult task. You will need good knowledge in analytics, a mathematical mind and decent experience working in financial markets. But before you learn how to trade on the stock exchange, more than one or two years will pass.
One of the bank’s employees shared information about how he learned to trade on the stock exchange: “I spent 3 years studying the material, about two thousand dollars and several hundred hours of trading in order to learn how to break even on the simplest trading instrument - options. Perhaps someone will succeed faster, but you definitely need to give up the dream that you can sit down and start earning money without knowledge and experience.”
His words just say that before speculating and trading on the stock exchange, you will need to study a lot of manuals, spend hundreds of hours at the trading terminal either on a demo account or on a regular A4 sheet. It would also be useful to “pump up” your emotional stability.
Watching an experienced trader, you will never know whether he made $2,000 or lost it. They control their emotions at the level of poker players. This is why playing on the stock exchange is so difficult.
But all this was true exclusively for trade. But what about two other areas: investing and issuing money for margin trading? With these areas of earnings, everything is much simpler. Investors should not have special knowledge in technical analysis. Their main task is to assess the prospects of assets.
And with cryptocurrencies everything is extremely simple. Does it have real value for? This means it will grow. Doesn't have or is best analogue? This means it will remain at the bottom.
And issuing money for margin trading is somewhat similar to lending. There is one “but”: the exchange acts as a guarantor for receiving funds.
It all happens approximately as follows:
A person has 1 dollar. He takes another 9 in order to make a profit of 10 times more. When an asset rises by 10%, a person will receive $1 instead of 10 cents, minus interest for using the amount. But if the asset falls by 10%, the deal will automatically close, since he has lost his dollar, and the system will not allow him to go into debt.
This principle is similar to the work of Forex brokers, who simply close transactions as soon as her account is drained by the entire amount + interest for using borrowed funds.
That is, if you lend money for margin trading, the exchange itself provides a guarantee of return. Your task is to have the required amount of funds to earn money.
How much can you earn on the cryptocurrency exchange?
This is a very interesting and important question that every bidder should ask himself sooner or later. Let's try to roughly predict the profitability based on the Bitcoin chart.
If you look at the Bitcoin chart, you can see that daily ups and downs often exceed 1,000 - 1,500 thousand dollars. That is, by investing 8,000, you can get 9,500. In the most favorable scenario, you will receive from 5 to 8% for each transaction when using margin trading. But on average, the profitability will be somewhere around 30 - 40% per month.
If you invest in Bitcoin now, then against the backdrop of its rise, you can earn 100-200% per annum at the current rate of rise. This is the most optimistic option.
If you give money to those who engage in margin trading, during periods of rush you can raise up to 50% per month. But during periods of recession, few people will buy your assets, so assets can often remain idle for up to 3 - 4% per month. On average, you will receive 50 - 60% per annum with an average investment style, not particularly following market trends.
As you can see, as profitability increases, risks also increase. The safest is lending to those who want to engage in margin trading, with a yield of about 50% per annum. The most profitable is intraday trading with huge risks.
A small forecast regarding the price of cryptocurrency in 2018
Everyone is interested in how cryptocurrency will behave in 2018. Especially after the recent rise and Bitcoin breaking the psychologically important mark of $10,000 at the end of 2017.
Let's try to figure out whether Bitcoin will grow, and with it the entire cryptocurrency. First let's talk about why it is so popular. Due to the fact that crypto implies anonymity of transactions, most people will use it to hide their payments from the government. The shadow sector of the economy, despite the fact that the world is actively fighting it, was, is and will be.
Plus, among other things, cryptocurrencies are being created that will be really useful for business. The same ether and its system of smart contracts, which guarantees the execution of every transaction recorded in its protocols. This makes crypto now one of the most interesting, and most importantly, sought-after assets on the market. Large companies are interested in blockchain, and in order to use the services of the same smart contracts, they need to purchase ether.
This is why cryptocurrency will always grow in the long term. And Bitcoin, as a flagship, will go forward until its very idea becomes a thing of the past. But until the resource for cue balls is completely exhausted, it will continue to grow.
In the short term, things are shaky. Many economists understand that Bitcoin is still an overvalued asset, even though in previous years it has shown growth of 1000% every 12 months. Some traders agree that the market is now artificially overheated.
But the majority still agree that the prospects for the growth of bitcoins and all cryptocurrencies are very bright. This is also shown by the fact that even after cue balls were declared illegal in China, with a population of more than 1 billion people, they quickly recovered, rose and are still breaking through new historical highs.
This is why it is worth investing in Bitcoin and new altcoins. And there is no need to assume that Bitcoin is a bubble that is about to burst. Yes, to some extent it may turn out to be an overheated asset, and most likely it is. But it won't burst like many people say. It can only roll back in value, but will invariably return to its position after some time.
Conclusion
Cryptocurrency exchanges are an excellent tool for not only selling mined assets, but also making money on them. And considering that this is a relatively young market, there are not so many participants in it, and therefore it is really good specialists is still catastrophically low. It is still very easy to become a cryptocurrency expert today. Take advantage of the moment and earn money.
Cryptocurrency trading can bring significant profits. Many cryptocurrencies have shown fantastic growth in short periods of time.
By purchasing Bitcoin at the beginning of this year, you could now increase your capital by more than 2.5 times. As of October 14, 2017, the price of Bitcoin (BTC) was at $5618.4. Looking at this price, those who did not buy Bitcoin in 2010 are biting their elbows.
The cryptocurrency market is growing very quickly, attracting millions of dollars in investments from investors from all over the world. More than 1,000 different tokens are already traded and new ones appear almost weekly.
All this attracts not only investors, but also traders who want to make money on exchange rate fluctuations. And the cryptocurrency exchange rate is quite volatile.
How to make money for traders who do not have a lot of capital
If a trader has a large deposit, then even small price fluctuations can make a good profit.
In contrast, traders who do not have the ability to buy a large amount of cryptocurrency cannot make enough profit in the short term. After all, with a small deposit, minor price fluctuations bring insignificant profits.
And in the long term, it is far from a fact that the selected asset will repeat and grow thousands of times.
Therefore, an excellent solution for traders with small deposits is margin trading with leverage. However, how excellent this solution is is to be seen further.
The essence of margin trading
Margin trading is the implementation of speculative trading operations with money and/or goods received by the merchant on credit secured by a certain amount (margin).
In trading practice, this means that the broker (or cryptocurrency exchange in our case) takes part of the trader’s funds as collateral and provides him with a loan to open a position. That is, the broker essentially adds his own capital to the trader’s transactions.
Accordingly, a cryptocurrency trader receives the following benefits:
- The volume of available funds increases, that is, you can buy more cryptocurrency.
- A transaction with a larger volume gives more profit.
- After closing the position, the broker takes the credit funds, and all the profit received from this money remains with the trader.
This type of trading is called margin or leverage trading. At the same time, leverage indicates how much funds an exchange or broker can allocate to a trader.
Leverage of 1 to 10 (1:10) means that a trader can operate with funds 10 times larger than his account.
Margin trading has been used in financial markets (including the Forex market) for quite some time. With the development of cryptocurrency trading, cryptocurrency brokers and exchanges began to offer leverage, providing the opportunity to trade digital currencies.
Margin trading allows a trader with a small capital to make a good profit using credit funds.
What does this look like in practice?
To better understand the principle of margin trading, let's look at a practical example.
Trade without leverage
Let's say you registered on a cryptocurrency exchange and have a deposit of $300. You want to earn some money and choose which cryptocurrency is best to invest in.
Your choice falls on the Golem (GNT) cryptocurrency at a price of $0.209844 and you believe that it has every chance of growing in the near future. Therefore, you decide to purchase Golem coins for your entire deposit. For $300 you get 1,429.6 coins.
After some time, the GNT rate rises to 0.25. What luck, you think, and sell all the coins. $0.25 * 1,429.6 = $357.4. Your profit was $57.4. In principle, not bad, but you could have earned more.
The same deal using leverage
It turns out that the exchange provides leverage of 1:10. You can open a position with a volume up to 10 times larger than what is possible with your deposit. Well, great. $300 * 10 = $3000. For $3 thousand you buy 14,296.3 GNT.
When the price rises to 0.25, you sell all the coins. $0.25 * 14,296.3 = $3,574.07. The exchange takes credit funds from you - $2,700. You are left with $3,574.07 - $2,700 = $874.07. From this number we subtract your initial deposit - $300, and get $574.07 net profit.
So, once again, for clarity:
- Profit without leverage - $57.4
- Profit with leverage - $574.07
Using margin trading, on the same price movement you can make 10 times more profit than when trading only with your own funds. The benefits are obvious!
Isn't it too simple
Too much. If you thought that everything couldn’t be so smooth and simple, then you were not mistaken. Do not forget that there may be another situation in which leverage will not work in your favor, but rather the opposite.
Let's leave the same parameters as in the previous example, just look at how the situation could have developed differently.
You use 1:10 leverage and buy 14,296.3 GNT coins for $3,000 (at the exchange rate of $0.209844). But the price of the cryptocurrency begins to fall and reaches $0.18886. What will happen at this moment? Your position will automatically close and you will be left with no money.
With such a price reduction, the loss on the transaction will be $300, and this is exactly as much as you have your own funds on deposit. By issuing a loan to you, the exchange does not want to take risks and lose its own money. Therefore, as soon as the amount of losses becomes equal to the amount of your personal funds, the transaction will automatically close, and the exchange will return its $2,700.
Look at this one more thing. If the trade had been opened without using leverage, your loss would have been only $30. In this case, you could wait a while, and perhaps the price would turn in the right direction. But even if you decided to close the position, you would only lose $30 (10% of the entire deposit, and not 100%, as with the use of credit funds).
This good example that leverage can cause large losses.
Where can you trade cryptocurrency with leverage?
Margin trading has become widespread in the stock, commodity and foreign exchange markets.
Trading cryptocurrencies is a relatively new type of income, but still a large number of exchanges provide the opportunity for traders to trade digital currencies using leverage.
Here are a few options where margin trading is supported:
- Bitfinex. One of the largest cryptocurrency exchanges offers leverage of 3.3 to 1 (3.3:1).
- CEX.IO. The exchange is also very popular among traders. To be able to trade with leverage, you need to pass verification. Leverage size is 3:1.
- Whaleclub. This trading platform provides the opportunity to trade in financial markets using cryptocurrency. Whaleclub offers a fairly large leverage of 50:1. This is for cryptocurrency, but for Forex the leverage is even greater - 200:1.
- GDAX. This platform provides conservative leverage of 3:1. To obtain this opportunity you need to go through several steps. The platform is mainly intended for professional investors with large capital (from $1 million).
- Bitmex. On this exchange you can trade with a leverage of 100:1.
Margin trading of cryptocurrency with a forex broker
Nowadays, cryptocurrency can be traded not only on specialized exchanges, but also with some Forex brokers.
And although the exchanges seem the best option, since they specialize specifically in cryptocurrencies, trading with Forex brokers has several significant advantages:
- More possibilities for analysis. On exchanges you can often find rather primitive functionality, with the help of which it is not very convenient to manage an account and make transactions. Forex brokers have an advanced MetaTrader trading terminal with a large number indicators for price analysis. In addition, you can use automated trading using robots and advisors.
- Better liquidity. A cryptocurrency exchange, as a rule, operates with its own (intra-exchange) liquidity. In general, large exchanges rarely have problems with order execution, but they can still happen. Forex brokers leverage market liquidity from multiple cryptocurrency exchanges simultaneously. This makes it possible to buy cryptocurrency at any time at the best price.
- Forex brokers have significantly lower commissions for depositing and withdrawing funds(may be completely absent). While for traditional cryptocurrency platforms it can range from 1.5% to 6% of the top-up amount.
With broker Gerchik & Co you can trade Bitcoin cryptocurrency on favorable terms:
- Leverage 1:10.
- The minimum transaction volume is 0.1 BTC.
- Commission - 1% of the contract amount.
Tips for Margin Trading
As we can see, trading using leverage can help a trader with a small deposit make a significant profit and quickly increase (“accelerate”) his deposit.
If a trader has a large amount of funds, leverage will help make even more profits. Margin trading allows you to make good money even on minor fluctuations in the cryptocurrency rate. However, with the same success you can lose quite large sums.
Margin trading attracts a large number of novice traders. Moreover, this applies both to classic financial markets (stock market, Forex market, etc.) and to the young cryptocurrency market.
Having learned about the opportunities that margin trading can provide, many beginners begin to make calculations, estimating how many transactions they can use to increase their deposit by 2, 5, or even 10 times. And although in theory such calculations are correct, traders completely forget about the risks.
Don't forget about risk management
One of the most important rules trading in financial markets (and investing) - compliance with money management and risk management. For a trader, this means that within one transaction he should not risk more than 5% of the total deposit.
It is better if the trader risks no more than 2-3%. Of course, such a strategy may seem too conservative. Indeed, by adhering to this rule it is impossible to get rich quickly, especially if the deposit is small.
However, risk management protects the trader from significant drawdowns and complete loss of the deposit.
If a trader decides to use leverage, his risks immediately increase significantly.
Even the minimum leverage, 2:1, already increases the risk by 2 times. If the price goes against the trader by 1 point, this will not be very noticeable. But if the position is in the red by 50-60 points, then a double loss can become a serious problem for the deposit.
What then can we say about large amounts of leverage?
Leverage 100:1 is tempting because with its help a trader can increase his small deposit several times in one transaction. In theory. In practice, even the correctly chosen direction of opening a position (buy or sell) will not always help.
In this case, a small price correction, even by 5-10 points, can lead to forced closure of the position due to a lack of funds to maintain it.
- Should not be used large size leverage. It’s better to start with the minimum - 2:1 or 3:1.
- Do not use all your funds in one trade. If you trade with leverage, invest only part of your deposit into the transaction. This way you will kill two birds with one stone: make a profit from margin trading and manage your risks. In this case, even if the market situation is unfavorable, you will only lose part of the funds, and not the entire deposit.
- If you are tempted to use high leverage (50:1 or more), and you imagine how much profit you can make, just think about the fact that you can lose exactly the same amount. Most likely you will not be happy with the prospect of huge losses.
- When trading cryptocurrencies, you need to be especially careful with the use of leverage. The exchange rate of digital currencies is very volatile, this can be seen in the example of Bitcoin (BTC). Yes, in the long term, Bitcoin is growing steadily, but from time to time there are significant drawdowns. And even within one trading session, the price of any cryptocurrency can be very volatile.
The unpredictability of price movements in itself carries serious risks, and high leverage multiplies them.
Conclusions
Margin trading - financial leverage, which helps traders make good money on short-term price fluctuations without large net worth.
At the same time, margin trading often causes the loss of deposits large quantity novice traders. Therefore, the use of leverage must be approached carefully and carefully.
Always calculate not only the possible profit, but also the possible losses that you may receive when opening positions using the credit funds of the exchange platform or broker.
Remember, the primary goal of a novice trader is to learn not to “waste” your deposit. At first, you should not expose your capital to unjustified risks.
And only when you develop trading system, which brings stable profits with proper risk management, you can try more risky strategies using leverage.
True, for such “experiments” it is better to allocate separate funds that you don’t mind losing.
04.02.2018
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Margin trading of cryptocurrency is very popular among traders, as it increases earnings significantly without increasing capital investments. Alas, like any income with high potential benefits, it has quite high risks. But if you understand its features well, the risks can be minimized. We’ll look at these features in this article!
What is margin trading on a cryptocurrency exchange?
Cryptocurrency margin trading is a type of speculative operations with cryptocurrency on a crypto exchange.
It differs from ordinary trading games in that the player speculates not only with his own assets, but also with borrowed funds, which he borrows from the exchange against the security of his assets.
With the help of borrowed funds, he can buy and sell several times more cryptocurrency than he could do using only his own capital, and therefore the benefit from successful operations also increases proportionally - several times.
The very name “margin trading” comes from the word “margin”, which in this case means, roughly speaking, collateral. Margin is the player's own funds, which he provides as collateral when he takes out a loan.
Margin trading works as follows.
Let's say an investor has $100 and confidence that a certain cryptocurrency, for example, will grow. He wants to buy it now so that later he can sell it at a higher price and make a profit in the form of the difference between prices. But with $100 he can only buy 1 litecoin (even less, but for clarity, let’s say it’s 1). This is too little.
Then he goes to a crypto exchange with the possibility of margin trading and borrows money there. In fact, he borrows them not from the exchange, but from another crypto investor, who provides loans to everyone at a certain interest rate.
The interest is mainly set by the lender himself, deciding for himself how much he is willing to allow another person to use his assets for. In view of this, on different exchanges and Percentages vary for different cryptocurrencies.
The maximum amount that a player in need of money can borrow from a lender is determined by the exchange. This amount is referred to as “leverage” and is indicated as a coefficient.
For example, a leverage of 1:1 indicates that the player can borrow as much from the lender as he has in his account. In our example it is $100. Leverage 1:2 allows you to borrow an amount twice as large as what is in your account - in our case, $200. A leverage of 1:3 will allow a player with $100 to borrow $300 and so on.
For the entire amount borrowed plus your own funds the player can buy the mentioned litecoins. That is, if he could buy 1 litecoin with $100, then with $100 + borrowed $300 (with a leverage of 1:3) he can buy 4 litecoins.
If the price of Litecoin actually increases, for example, by 20% and is therefore $120, the player will sell the 4 coins he bought for $480 and make a profit of $20 x 4, that is, $80. He keeps this $80 minus the exchange commission for the transaction (0.1-0.2%), the commission for taking out a loan (also about 0.2%) and interest on the loan.
$100 - his initial funds - also remains in his account, and he returns $300 to the creditor. The net profit would therefore be $80 minus interest and fees, probably a little over $75.
If the player had not used borrowed funds and only traded his $100, he would have made a profit of $20 minus exchange fees.
Cryptocurrency margin trading: features
When the expectations of the player who took out the loan are met, the situation unfolds to the benefit of everyone: upon closing a successful transaction, the player returns the funds to the lender with interest and is left with a profit. But the player's expectations may not be met.
For example, Litecoin from the example above may not rise by 20%, but fall by 20%. It turns out that the player bought 4 litecoins for $400, but can only sell for $320, that is, with a loss of $80.
The creditor, of course, should not suffer from the fact that the player’s forecast did not come true. Therefore, as soon as the value of the player’s assets (both borrowed and own) reaches the size of the loan with interest, that is, the amount that the player must return to the lender, the exchange automatically closes all the player’s positions and returns the creditor his funds.
At the same time, the amount returned to the creditor fully includes the margin - the player’s funds that he initially had and which he provided as collateral. Thus, he loses, in addition to the borrowed assets, also his own.
This situation is referred to as “margin call” from the English. margin call - “margin call”, “message about the approaching limit”. That's what it was called phone call from the broker to the client in those days when interaction between exchange participants took place by telephone.
A margin call warns the player that a limit is approaching, upon reaching which the funds from the account will be debited in favor of the creditor.
To prevent this from happening, the player can replenish his account, thus informing the exchange that he is ready for a further decrease in the price (and still expects it to increase after the recession). Or he can do nothing and wait for the position to be automatically closed.
Also, the difference between margin trading and regular trading is that when buying cryptocurrency without leverage the trader becomes its owner, that is, he can withdraw it from the account, spend it, and so on. When buying with leverage, he cannot withdraw either it or the margin - the exchange does not allow him.
Cryptocurrency margin trading: secrets of success
The success of margin trading depends primarily on the skills of the trader.
Speculation strategies for margin trading are no different from regular ones. A trader can open a short or long position if he expects the cryptocurrency to fall or rise, or to engage in borrowed funds. if you are confident in your abilities and success.
It’s just that the risk in this case is greater, because without a loan, if he fails, he loses his own funds in the amount of x, and with a loan - in the amount of 2x, 3x, and so on, depending on the leverage.
But to achieve maximum profit It is when margin trading that you should take into account a number of nuances and pitfalls:
- The first rule of successful margin trading - do not bring the situation to a margin call.
Experienced players do not wait until their losses reach 100% when the exchange rate falls. They rarely even wait until 50%. Most often the limit is set at 20-30%.
This means that as soon as the price will go in a direction unfavorable for the trader and losses on his account, taking into account the loan and interest, will be 20-30%, all assets purchased with loan funds will be automatically put up for sale at market price, and the loan with interest will be returned to the lender.
Thus, the trader’s losses will be 20-30% instead of 100%, which would occur with a margin call. This automatic order to sell (or buy) an asset at a limit price is called a “stop loss”.
Sometimes a trader can be sure that after a fall, the rate of assets purchased with credit funds will rise again. Then he replenishes his account in advance with an amount that will not allow him to reach the margin call, for example, the entire amount of the loan taken or 50-70% of it.
This way, he eliminates the risk of automatic loss of funds during a margin call and calmly waits for the cryptocurrency to grow. But it should be noted that this is a risky strategy and requires confidence in the rate increase, which usually stems from a thorough mathematical analysis of the market and is rarely based only on intuition.
- Second rule: before taking out a loan, you need to calculate the potential amount of interest payments to the lender.
The lender receives interest for each day the funds are used. The longer a player uses credit funds, the more he will have to pay the lender.
If the interest rate is high (this happens when the lender provides rare cryptocurrencies, for example), and the player uses the loan for too long, then the final payments to the lender can reach significant amounts.
- Third rule is that it is necessary to carefully consider choosing a cryptocurrency for speculation.
Extremely dangerous for margin trading. Without leverage, it makes sense to speculate on them, since their value after a strong fall can also rise sharply. Leveraged them sharp drop or a jump can also sharply trigger a margin call, and even if the player replenishes the account, the possibility of reaching the limit again cannot be ruled out.
Plus, the greater the leverage, the greater the risk. And it doesn’t matter that after the fall the currency will rise: if a margin call occurs, the player will automatically lose money.
But currencies that hardly fluctuate are not suitable for margin trading. If the currency stands still, an investor who bought it without leverage will lose nothing. And a speculator who bought it with funds borrowed from the lender will be forced to pay him interest on the loan.
With weak currency growth, almost all profits can go to interest, and sometimes the player has to pay extra even from his own funds.
- Fourth rule: we must not forget thath The collateral is the assets that are in the trader’s account, regardless of the currency in which the loan was taken.
For example, a trader may have 1 litecoin in his account, which at the time of taking out a loan is worth $100. A trader takes out a loan in dollars, intending to speculate on a third currency, for example, . Meanwhile, Litecoin is falling against the dollar, and now 1 Litecoin in a trader’s account corresponds not to $100, but to $90.
As a result, the margin automatically decreases and the margin call is approaching, although the trader may not have actual losses as a result of unsuccessful trading. Therefore, you need to pay attention to how much the price of all assets put up as collateral corresponds to the price they had at the time of taking out the loan.
Cryptocurrency margin trading: pRecommendations for novice traders
For players who have decided to try their hand at margin trading for the first time, there are several universal recommendations:
- Start with small loans. That is, take a loan at a ratio of not 1:10 and immediately increase the risks 10 times, but at a ratio of 1:2, increasing the risks by only doubling.
- Determine the amount, which can be lost without damage for your financial situation, and take out loans for no more than 10-30% of this amount. That is, if an investor can afford to lose $1000 in trading, then he should credit $1000 to his account and take out loans for $100-300.
- Set limit orders(stop loss) by 20-30%. If you follow the previous recommendation, the loss will be $20-90, which, although undesirable, is acceptable with an initial capital of $1000.
- Choose familiar cryptocurrencies. You should not start with a currency whose rate fluctuation chart the trader saw for the first time. It’s worth trading a currency without leverage, understanding how it behaves in the market, what ensures its value, and what factors its price depends on. When the patterns are determined, then it makes sense to take out a loan.
- Take a loan wisely. It makes sense when margin trading is much more justified than regular trading. For example, if there is a rapid growth of the currency or there are clear prerequisites for it (good news, the release of a promising fork, and so on).
To summarize, we can say that for a player who knows exactly why he is taking out a loan, knows how to calculate his risks and, of course, predict the situation on the cryptocurrency market, margin trading can become a source good income in the absence of significant start-up capital.
On the other hand, the higher the loan size, the higher the risks, and this rule works everywhere. Therefore, for a novice player care must be taken, do not give in to emotions and remember that greed in trading games is not the best policy.
Today we’ll talk about the topic of margin trading, the pros and cons.
Margin trading is trading within a day/week/month/year. That is, during any time period. The crypto trading market is quite young, but some exchanges (GDAX, Bitstamp, CEX.io, Bitfinex, Bitmex) actively offer market participants such a trading tool.
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Margin trading on the Bitmex exchange
The first advantage of margin trading is the ability to hedge your funds in case the market falls. This is the so-called opportunity to short.
Let's look at the chart of one of the exchanges (Bitmex).
When you go to the stock exchange, you see this window in front of you:
Bitmex, how to short cryptocurrency
Select the number of contracts and price (Bitmex is described in detail in one of our articles).
Review of the Bitmex exchange, how to fund your account and trade with leverage
Press the button - sell (this is short). Circled in green. After this you will see the following window (order confirmation):
Bitmex, short position with 100x leverage
Click Sell, and the order is placed according to the specified parameters.
Bitmex, short position
When the price reaches your order, the exchange will execute it and your position will be sold, according to the terms of the order.
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To close this position and get a profit, you need to perform the opposite operation - buy. For example, the price reached the level of $17,420 (open short), then dropped to the level of $16,500 (buy/long). Enter the mirror number of contracts (if you sold 100, then you buy 100; if you sold 1000, then you buy 1000) and the current price at which you want to close the order.
Bitmex, closing short positions
Click buy according to the specified parameters, and the system closes your position.
Bitmex, margin trading calculator
Your margin is easily calculated using the calculator. Click on the icon (circled in green) and a calculator window will pop up.
In the calculator you can estimate how many contracts you can buy/sell and what margin is possible as a result of your trading.
Margin on the Bitmex exchange is accrued in BTC, symbol XBT. That is, if you earn 0.0003 XBT, your margin is 0.0003 BTC. If you bid 10,000 contracts, your potential margin could be 0.0320 BTC. With 100,000 contracts – 0.320 BTC, etc.
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Important point. On the Bitmex exchange it is possible to use a very large leverage – 100x. Leverage is the ability to take on many times more contracts than your deposit allows without leverage. 100x leverage is a very effective and risky tool!
Bitmex, 100x leverage
It is risky due to the fact that at the time of using leverage, the exchange indicates the liquidation price, which is usually very close to the order opening price.
For example, with 1,000 contracts and a price of $17,420, the liquidation price with 100x leverage will be $17,503.5. The contract amount will be 0.0006 BTC, and the loss will be 0.0574 (column - order amount).
The contract amount is 0.0006 BTC - this is part of the deposit that is withdrawn from you immediately upon execution of the contract. It is returned if you close the position with a profit. If the liquidation price is reached, then no. To minimize losses, always place stop orders.
Market stop tab. Choose the same number of contracts, 1,000, and a price of $17,430 (that is, higher than $17,420). If you were selling, that is, shorting, then put a stop in the opposite direction - buy. If you bought, then stop also in the opposite direction - Stop selling.
And you confirm:
Bitmex market stop
Thus, you minimize your risks when trading with high leverage.
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A big plus of leverage is the opportunity to earn more with a small deposit. For beginners, I do not recommend using leverage above 3-5x. The liquidation price will be much lower than the entry price, but it is better to get your hands on small volumes and risk levels.
One of the disadvantages of the Bitmex exchange is that if you do not want to short, but the market is in a correction and you want to sit out the drawdown in fiat, then, unfortunately, there is no such function on the exchange. Then you need to use: Bitfinex, GDAX, CEX.io or Bitstamp. On these exchanges you can sell the cue ball without entering into margin trading.
Margin trading on the Bitfinex exchange
Let's look at the functionality of another exchange. For example, you want to short 1 BTC at a price of 13697 on Bitfinex. Choose margin trading (Margin tab, not Exchange!). Enter the data and click Margin Sell (the price is circled in green).
Bitfinex, how to short
Accordingly, the reverse operation is to buy Margin Buy. For example, $13,200.
Bitfinex, how to close a short
As a result, your earnings will be: $13,697 – $13,200. That is, $497 for one BTC. If your balance allows you to take, say, 10 BTC, then you will earn $4,970 from a market decline.
Important point. The Bitfinex exchange allows you to use leverage up to 3.3x. Moreover, if you use leverage, the system immediately blocks 15% of the order amount for your current order. The exchange calculates the liquidation price based on its data and automatically displays it when placing an order.
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Stop orders
I highly recommend placing stop orders on the Bitfinex exchange, since the exchange has high liquidity and is often seen in rate manipulation and sudden price breakouts. So that your order is not carried out in one candle due to a trading failure of some bot or panic selling/euphoric buying.
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OSO warrant
The OCO order type is quite practical for setting stops.
For example, you opened a position on Bitcoin in the amount of 1 BTC. The short position is sell. Entry price $13,697. That is, we did Margin Sell, as in the first example.
Next, go to the OCO order. In the order window, set the following values: PRICE USD – $13,200 (this is the exit price, that is, your take profit!), OCO STOP USD – $13,700 (this is the price of your stop order). The OCO order allows you to automatically place an order to close a position and a stop order in one window. After entering the required data, click Margin Buy and the exchange will place your order.
Bitfinex, OCO order
If the market is growing, then you can open a long position – that is, buy. Then all operations will be mirrored, as with the position of shorts.
Limit and Market orders
I always advise opening positions with limit orders (if the market allows).
There are also market orders. That is, your long/short order will be executed at the market price (current), but the commission will be higher than with limit orders. On commissions - read the exchange guidelines and our exchange reviews for more details.
Bitfinex, Limit order
It comes first in the list – a limit order.
Trailing Stop order
An interesting tool is Trailing Stop.
This is an order that works like a stop (closing), but follows the price.
Bitfinex, Trailing Stop order
For example, you have an open position long 1 BTC at $13,200. Trailing stop allows you to set the distance between the current price and the closing price in USD. In this order, set $50 difference in price movement. This means that when the price reaches $13,300, the trailing stop will rise to $13,250. And if the price falls to $13,250, then it will not move and the exchange will close your position with a plus of +$50.
If you bought, that is, a long was opened, then you place a Margin Sell. And vice versa.
As for the Bitmex exchange, this stop order has one feature. If you bought a position, then to set a trailing stop, you need to put a “-” sign in the value column.
Bitmex, Trailing Stop order
For example, you want this stop to follow the price up with a difference of 10 USD. Set the value “-10” and the exchange will set it.
If you have an open sell order and want to place a trailing stop, then in the value column simply write the desired number without signs.
Trailing Stop also has its downsides. If the price drops sharply against your trailing stop, the exchange will execute it, but not at the current price, but at the market price at the time the order is executed in the order in which it is ordered. This may lead to the order closing your position not at zero or plus, but at minus. The Trailing Stop order can only be used on a smoothly growing market in order to collect the maximum movement. But it is better to close a position with a limit order (short/long based on your open position), and simply cancel the trailing stop and use it as a small insurance.
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The article shows only small examples of margin trading. This topic is not just one article/lecture/lesson.
Margin trading is a very risky and profitable type of trading. It takes time to study it. I hope that the article will be useful to readers, and everyone will find new and effective trading tools for themselves.
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