If you’re looking to trade in crypto but are worried about where you’d get the funds, crypto marginal trading can be the ideal solution.
Also known as leverage trading, crypto margin trading is a widely used practice in the cryptocurrency market wherein you can borrow capital funds from a third party and then invest it in a profitable trade. Such investment can lead to high profits, which can be utilised to gain more returns.
However, no such guarantee exists, and the trade can also result in a loss. Margin trading lets you invest in cryptocurrencies with more money than you currently have, potentially allowing you to increase your profits.
The Basics Of Crypto Margin Trading
Suppose you wish to buy cryptocurrency but don’t have the required funds. In such cases, you can invest a certain percentage of the total amount as collateral and borrow the remaining amount using margin trading. Let’s understand this better with an example.
Suppose you want to buy crypto worth $10,000 but only have $2,000 now. You can deposit the $2,000 as collateral and borrow the remaining capital of $8,000 with the help of margin trading at a low-interest rate.
Crypto margin trading has gained a lot of popularity among crypto market investors. This is because they now have the option to buy more cryptocurrency with the leverage provided through margin trading than they can afford. This increases exposure with a lesser capital investment.
Additionally, margin trading might also lead to higher profits on your investments. This is because when you buy more crypto, you can get more profitable ROIs on that purchase.
Isolated Vs. Cross Margin Trading
But how do you choose the type of margin trading crypto? The following comparison illustrates the differences between isolated and cross-margin trading to help you make an informed decision.
Isolated Margin Trading
If you’re using isolated margin trading, it can reduce the risk of losses on your balance by adding restrictions to your trading margins. This means you can assign specific margins to every trading position so that even if the trade gets liquidated, it does not affect your entire account balance. It is more suitable for trading positions that need higher leverage.
For instance, let’s say you decide to buy crypto with a margin of $10,000, but you wish to avoid risking more than $3,000 on one position. Then, in the case of isolated margin trading, you can restrict the margin to $3,000 in that specific position so that if it results in a loss, you do not lose your total balance of $10,000.
Cross Margin Trading
While using cross-margin trading, it is essential to remember that it sets the trading margin across shared positions such that the profits from another position can balance any losses at one position.
It prevents the liquidation of funds at certain positions. This type of margin trading suits situations where you must handle multiple positions simultaneously.
Let’s assume you set a margin balance of $10,000. If you’re using cross-margin trading, this entire balance will be used for trading at several positions. If any trade is liquidated, you are at risk of losing your total balance of $10,000. Then, you will have to add additional funds to your account to prevent the liquidation of your account.
Moreover, some exchange platforms also offer smart cross-trading that enables margin requirement offsets for positions in opposite directions. This means that any excess gains earned at a long position (purchase of assets) will compromise any margin deficiency on the short position (sale of assets) and vice versa.
Thus, you must choose the right type of margin trading only after thoroughly studying the pros and cons of both types.
Comparing Margin Trading And Spot Trading
Do you ever wonder about the difference between margin trading cryptocurrency and spot trading? Let’s compare them both and find out!
Spot trading in cryptocurrency can be considered a regular form of crypto trading in which an asset can be bought or sold at a certain price in exchange for cash. It is known as spot trading because once you execute a buy or sell transaction through it, the trade is settled immediately, and the ownership is transferred on the spot.
Spot trading is a better alternative for people beginning their crypto trading journey. This is because beginners prefer to invest in a lower-risk environment. Thus, it is simpler and safer to practice. Additionally, it comes under short to medium-term trading, i.e., the period involved in spot trading is less.
Popular exchange platforms like Bisq, Coinbase, and Kraken support spot trading.
Margin trading involves borrowing additional funds from a third party to perform a trade on low-interest rates. It is practised so that you can earn more profits by trading more cryptocurrency than you could by using your funds.
In the case of margin trading, you can trade with the help of leverage if you’re at a loss of funds, but you need to have collateral in exchange for the borrowed funds. Moreover, it would be best if you first opened a position in margin trading to trade crypto. You will only know if you’ve earned or lost a profit after you’ve closed that position.
Margin trading is more convenient for you if you are an expert in predicting the movements of the crypto market. However, if the prediction goes wrong, you must also be an expert at accepting losses. This means that although margin trading has higher profitability benefits, it also has higher risks.
Popular exchange platforms like Binance, KuCoin, and Kraken support margin trading.
As both spot trading and margin trading have pros and cons, you must evaluate which suits your needs best and then take your pick accordingly.
Benefits And Risks Of Crypto Margin Trading
Before beginning your crypto margin trading journey, you must be made well aware of its benefits as well as the risks associated with it.
- The most significant perk of using margin trading is that it works towards amplifying your gains. You can make a lot more profit with just a little margin.
- It enables you to open larger trading positions. These positions can be opened with the help of borrowed capital at a very low-interest rate.
- Margin trading needs a significantly lesser capital requirement to open a trading position than if you were to do it with your capital.
- Like the chances of greater profits, there are also equal chances of greater losses in margin trading. It may often turn out that the losses incurred may be more than the amount invested in the trade.
- Considering the high volatility of the crypto market, with fluctuations happening every minute of the day, margin trading may prove to be extremely risky as these conditions make predicting the trade’s profitability difficult.
- The timing and exit strategy in margin trading cannot be easily understood. You may bear losses if you do not close your position with your profits immediately.
Fees In Crypto Margin Trading
After evaluating the pros and cons of margin trading crypto, it is important to understand the charges or fees involved in practising margin trading.
The margin trading fee depends on the platform you choose to perform your trades. Most of these exchange platforms have a fixed fee on the margin pair trading. Mainly, they ask for a small percentage, such as 0.1% or 0.2%, to be paid when you open a position.
In addition, they also charge an interest rate on the funds you borrow, which is paid daily until you decide to close your position.
Popular platforms like Binance and Phemex allow fees to be paid as interest in tiers daily; KuCoin and Crypto.com accept a fixed interest to be paid daily, while Kraken has a fixed fee to be paid daily.
Popular Platforms For Crypto Margin Trading
If you’re looking for platforms supporting margin trading, below are some popular exchange platforms that support crypto margin trading.
Binance is a powerful name in the crypto industry as it offers various spot and margin trading features. Let’s explore margin trading through Binance in detail.
Binance offers you a high leverage of 10x on your trades. The maximum leverage on your trades depends upon the trading pairs involved. Binance also supports trades on more than 600 pairs of cryptocurrencies at a cheap trading cost.
Binance offers products such as both margin(trading through borrowed funds) and futures (trading crypto at a pre-determined price) trading, option & leveraged tokens. These leveraged tokens save you from maintaining the minimum margin the exchange requires.
Additionally, Binance provides Insurance Funds that can help you if you cannot pay your debt due to bankruptcy during margin trading.
Binance charges a daily interest fee depending on your trades. This means that if you hold a trading position for a long time, you will have to pay higher interest on it.
Kraken is a leading margin trading platform that comes under the top 10 exchanges per its daily trading volume. Let’s explore its features in margin trading.
Kraken allows you a leverage of 5x on your trades in cryptocurrency margin trading. These trades may include cryptocurrencies such as BTC, ETH, USDT, etc.
Kraken offers both margin and futures trading that allows you to boost your profitability through leverage, supporting a variety of 233+ crypto trading pairs.
Kraken charges a fee of 0.01 to 0.02% as trading fees daily. Moreover, it charges the same rollover fees every 4 hours as long as the position remains open. So, if you hold your position for a long time, you will have a high rollover fee.
KuCoin is a crypto exchange platform offering various services and crypto tokens for margin trading. Let’s study its features in detail.
KuCoin offers a leverage of up to 10x on margin trading, supporting over 100 cryptocurrency trading pairs.
Like Binance, KuCoin offers products like margin, futures trading, and leveraged tokens. These tokens are considered an advanced version of margin trading as they do not risk liquidating your assets in case of losses.
KuCoin charges a 5% fixed daily interest as fees on your cryptocurrency trades. Along with this, it also charges 10% on your trades as an insurance fund.
Tips For Crypto Margin Trading And Risk Management
After fully understanding margin trading cryptocurrency, you must have already gathered that trading through leverage is a tricky business. So, below are some tips you can follow to avoid risks in trading.
Invest What You Can Afford to Lose
Realising that margin trading can also bury you waist-deep in losses is important. This is why it is essential to carefully plan out and evaluate your investment strategy and be aware of the risks you will take. Study the losses you may have to bear in margin trading so that you only invest what you can afford to lose.
As cool as earning sky-high profits in the crypto world sounds, it is extremely important to recognise the risks associated with each of your trades. Hence, starting with small trade transactions regarding margin trading is advisable. As a beginner, you must understand that losses are as highly likely as profits before opening larger positions.
With its extreme ups and downs, the crypto market can only be trusted sometimes. With this level of volatility, even if you’re consistently earning profits on an open position, you may lose it all in one go if you need an idea of when to take your profits home.
Thus, you close your positions and take your profits regularly to avoid losing them in the constantly changing market.
Use Stop Loss Orders
Stop-loss orders are an efficient way to restrain your losses or lock your gains in a position. So, if any crypto you hold at a position rises or falls, the position is automatically closed. Stop-loss orders are a highly suitable feature if you don’t actively trade.
Maintain Separate Trading Accounts
Maintaining a separate trading account for margin trading is encouraged widely in cryptocurrency trading. It eliminates any confusion about what assets have been kept to be used and what is to be held as collateral while borrowing funds.
If you want to be a successful trader in margin trading, it is important to understand the value of continually exploring more about it. Although this guide has significantly paved the way for you to start, you must research on your own to become well-versed in margin trading.
Crypto margin trading can be a beneficial tool in crypto trading if you learn to use it efficiently. If you know how to make reasonable predictions in the crypto market, margin trading may earn you a profit. However, bad decisions in margin trading losses may ruin your account. Educating yourself comprehensively on margin trading to trade responsibly is essential.
Taxations are a huge part of responsible trading. You’re liable to pay taxes if you profit from margin trading, and manual calculation can be time-consuming. This is where KoinX comes to your rescue. It’s an automated tax computing platform that can give you accurate crypto tax reports in seconds. So why wait? Join KoinX today and get your crypto taxation sorted.
Frequently Asked Questions
Q. Is margin trading a good idea?
Some people have been highly successful in margin trading, while others have suffered extreme losses. Hence, margin trading can be considered a great tool for trading only if you have detailed knowledge and understanding.
Q. What is 10x leverage on crypto?
A leverage ratio in margin trading determines the leverage available for your trade. A 10x leverage or a 10:1 ratio means that you can place a trade worth 10 times your collateral.
Q. What is long-margin trading?
You can bet that the crypto price will go up in long-margin trading. Thus, you can buy crypto at the current price and plan to sell it when the prices increase.
Q. What is short-margin trading?
In short-margin trading, you can bet that the prices of crypto are going to drop. So, you can sell it at a higher price and buy it when the prices drop later.
Q. Is margin trading and gambling the same?
Although you might be able to draw some similarities between margin trading and gambling, they are not the same. Margin trading involves strategic planning that can make high profits on your trade if properly executed.