Cryptocurrency Investing

What Is Crypto Margin Trading and How Can You Use It to Your Advantage?

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If you’re interested in trading secure cryptocurrencies, the first thing to do is to get the right wallet for your choice of virtual coin. For example, you’ll need to get a Monero wallet if you’re interested in trading XMR. Similarly, you’ll have to get a Bitcoin wallet if you’re planning on trading BTC.

From there, it’s simple enough to find an exchange and do straightforward crypto trades. But what if you’re interested in even higher potential profits than what your current capital lets you do? One way to achieve this is through margin trading.

What Is Crypto Margin Trading?

Margin trading is the practice of borrowing funding from an exchange or other traders and using this to facilitate a trade. This is also sometimes called “leveraged trading,” especially when the amounts borrowed are beyond the capital currently available to a trader. Funding for a margin trade is provided by margin lenders, who are most often brokers or other users of a given trading platform. Margin trading can be done with any commodity, including stocks and cryptocurrency.

The main benefit of cryptocurrency margin trading is the potential for much higher profits than would be possible with just the capital that’s available to the trader. The biggest drawback is that the risk exposure of the trader increases as well, which can mean significant losses should the market take a downturn.

How Do You Start Margin Trading Cryptocurrency?

The specifics of margin trading differ depending on the platform one uses. However, broadly speaking, most platforms facilitate margin trades in a similar way.

First, the trader decides how much of the total cryptocurrency order value to commit to. This proportion is the “margin.” Next, the trader decides how much risk they’re willing to take on. For example, for a USD 5,000 trade with 2x (2:1) leverage, the trader needs to put up a minimum of USD 2,500 or 50 percent capital. The trader then has to borrow the other 50 percent and pay back the lenders with interest.

Leverage ratios can vary wildly in cryptocurrency markets, with ratios of 100x (100:1) and greater often being seen. The more leverage needed, the greater the risk exposure. However, newbies to margin trading should limit their exposure until they are more familiar with how the process works.

This is especially important because initial funds can be force-sold by the crypto exchange if the market goes against the trader’s position and hits a liquidation price threshold. Novice traders can easily lose most of their holdings by failing to understand the risk of margin trades in volatile markets such as cryptocurrency.

Can I Fund Margin Trades Instead?

Yes. As mentioned earlier, traders can borrow from other users of a crypto platform. This affords risk-averse traders a way to still profit from cryptocurrency margin trading without excessive risk through margin funding.

Margin funding is the lending of funds to other traders. In exchange for their loans, lenders receive yields on interest rates as well as other benefits agreed on in the loan contract. It’s worth noting that while there are different specific mechanisms present in each exchange, they all work similarly. That said, margin funding will always present a reduced risk compared to directly engaging in a leveraged trade.

Is It Easy to Lose Money on Crypto Margin Trades?

Both gains and losses can be amplified through margin trades of any commodity, cryptocurrencies included. The risks of loss are especially high in cryptocurrency trades because of the volatility of the market and the unfamiliarity of many traders regarding the movements of different cryptocurrency markets.

However, this isn’t to say that traders should avoid margin trades. Those with experience, discipline, and a healthy appreciation of risk can easily use margin trading as a foundational strategy for success. However, beginners and other traders who haven’t got the time to familiarize themselves with the market should probably stay away.

In short, margin trading of cryptocurrencies is not the get-rich-quick scheme a lot of people seem to think it is. It takes a lot of time before a margin trading strategy can become viable or safe for most traders.

Should You Try Margin Trading?

As with any kind of trade, margin trading cryptocurrency is only for those that understand its implications. It is an especially risky type of trade in an already volatile kind of market. As such, you shouldn’t just have a good grasp of the basics of cryptocurrency and trading. You should also be realistic and thoughtful about what you could actually achieve with a leveraged trade.

People who have only recently started trading in crypto or those who are risk-averse should stay away from cryptocurrency margin trading. Those who have enough reserves to cushion potential losses may find margin trading to be a good way to quickly amplify profits and positions, though only very experienced traders may find this a feasible strategy.

If you decide to start margin trading Monero and other secure cryptocurrencies, it’s best to start small with a dedicated Monero wallet to limit your exposure. This way, you can get first-hand experience with the numbers and analysis, as well as a better feel for what direction things are taking without putting yourself at unnecessary risk.

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