In our last post, we narrated about What is Crypto Margin Trading and Costing of Margin Trade with examples. If you missed our previous post, please check here. In today’s post, we would discuss about Pros and Cons of Crypto Margin Trading.
Cryptocurrency Margin Trading is like availing Home Loan. Just as you can buy a Home worth 50,00,00 with 20% down payment[i.e., 10,00,00] and rest 80% as a loan, similarly in margin trading of cryptos, you can own Bitcoin or Altcoin worth $5000 with just $1000 capital with 5x leverage. The mechanism of holding high worth seems lucrative but has associated risks with it. Let’s take a closer look at the advantages and disadvantages of Crypto Margin Trading.
Pros of Crypto Margin Trading
Margin Trading concept was born in the US and is now accepted widely across the globe. Let’s look at the advantages of cryptocurrency Margin Trading –
Access to High Worth at less Price
One of the most straightforward advantages of margin trade is owning a high worth asset at a lesser price. With Margin Trading a trader could own a digital asset worth of $10,000 by paying $2000 [excludes fees] with 5x leverage.
If the trader has studied the market proactively and made the right decision to invest in Margin trade, with an upward market trend he can attain profit. Just for example if you have a margin call trade for a digital asset worth $10,000 by paying $5000, if using the leverage of 2:1, you can double your gains.
Cons of Crypto Margin Trading
Every coin has a flip side, so if you thought Cryptocurrency margin trading would only lead to profit and gains, hold on. Margin trading comes with its own set of risk, let’s evaluate –
Borrowing Money To Margin Trade Comes at a price
As a trader, there is no harm in dreaming of owning $1000, $10,000 or even $50,000 worth of bitcoins. With Margin trade it is possible as well, but the initial capital [assuming leverage of 2x] you need to borrow from lenders, you would need to pay interest on that amount. Now, this interest varies from exchange to exchange. Hence when you are calculating your gains, make sure to put in the interest amount you need to pay from your pocket.
Losses Could Be Amplified
Just as we saw gains are multiplied, and a trader could double his profit. Similarly, if the investor has not evaluated all the factors of market risks and cryptocurrency risks, the losses could be augmented.
Risk of Margin Call
Each exchange makes it a mandate for traders to maintain a minimum account balance say for example 25% of the open position. So in cases where the market is sailing in the opposite direction against your predictions, even your balance would fall below the set margin requirement, either you need to add more funds to your account balance to avoid a margin call or else the account would be closed automatically.
To excel in the art of Margin Trading all you need is an in-depth knowledge of cryptocurrency markets and risk management. Margin Trading is a useful investment strategy if applied intelligently could lead to a bigger account balance.
Our next post would talk about different exchanges that allow Crypto Margin Trading. Stay Tuned.
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