Crypto Margin Trading – Everything you need to know

How could a crypto investor who has a limited amount of cryptocurrency add leverage to his investment portfolio? One of the options that could pay off but is a risky investment is Margin Trading. Margin Trading allows investors to upsurge the amount to be invested without holding the assets. Though it sounds simpler is considered to be a risky strategy and not recommended for everyone.

What is Crypto Margin Trading?

Margin Trading is a concept where the traders are allowed to open a position with leverage. Picking an example would be beneficial here –

Assume you are keen to purchase 1000 shares of XYZ, which are currently trading at $5, so the amount of capital you need is $5000[1000*5]. Now with Margin trading, you can buy a future contract of XYZ by paying 20% margin, that means by investing $1000 you can get exposure to the stock of value $5000.

Leveraging has helped an investor to manage a portfolio worth $5000 with just $1000. Leveraging would also help in making profits if the prices of the stock shoot up.

In crypto world, the concept is similar where Margin Trading is conceivable due to growing interest of cryptocurrency users in the lending market. Funders offer loan to investors, while lenders earn interest on the loan released, the investor uses this money [ in crypto, bond or fiat form] to invest in more significant amounts of coins.

Lets again pick an example –

So you are planning to buy $10,000 worth of Bitcoin

With borrowing 50% Or leveraging 2:1 or 2x

Then you would only need $5000 to purchase a bitcoin worth $10,000.

Globally, we have two types crypto exchanges model, one where customer themselves offer the loan for the margin market and second where exchange itself provides them.

Costing of Crypto Margin Trading

Margin Trading is considered to be a risky investment and hence also serves as a high return strategy. So while leveraging is the best reward earned, it could also turn into bankruptcy risk when there is a steep fall. So as the investor’s chance of gaining more increases at the same rate there is an increase in the risk to lose more. Hence exchange fixes a value called as liquidation value. It is the value where any exchange would automatically close your position so that you do not lose any of the loaned money, and only lose your own money.

Cost of Crypto Margin Trading

The cost of a margin position would include

  1. The interest for the borrowed coins
  2. Fees for opening a position with the exchange

Continuing the same example of borrowing $10,000 worth of bitcoin with 2X leverage you would need $5000, so either you can borrow this money from exchange/lenders that would mean to pay interest and also a fee for opening a position with the exchange.

So total cost of buying a theoretical $10000 worth of bitcoin would be –

= $5000 + interest [ varies from 5% to 50%] + fees

Our next post would talk about the pros and cons of Crypto Margin Trading. Stay tuned.

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