We spoke a lot about Crypto Margin Trading, How it works, pros and cons, Ethereum Margin trade, bitcoin margin trade, and even margin trading tips but there are some of the terms which are yet to be explored. Our post of today would narrate some of the terms like – Margin Trading, Margin Funding and What it means to have a long position and short position in a Margin trade.
Let’s get started –
Margin Funding and Margin Trading – What’s the difference?
What is Margin Trading?
Margin Trade or Margin Trading is a process of borrowing funds from brokers/exchanges that could be used to buy cryptos of a large amount. So for example –
If 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.
With the leverage, an investor is allowed to own a capital worth more of its buying capacity. There are many platforms that offer a leverage up to 100x, but please be cautious before investing as it’s a risky venture.
What is Margin Funding?
Margin Funding is precisely opposite of the margin trade, where the lender offers amount to a trader to fund an investment.
So continuing the same example –
If a trader is planning to buy $10,000 worth of Bitcoin. 2:1 or 2x leverage, the lender or funder could offer a loan of $5000 to the trader.
The trader would need to pay a margin funding interest fixed by the borrower/platform. Here the terms, i.e. return rate, duration, and the amount could be chosen by the lender or fixed by the exchange.
Margin Funding is considered to be a safe option for many investors, as the borrower pays for your losses.
Long Position and Short Position in Crypto Margin Trading?
In Margin Trading, investors need to apply their intelligence and analysis to predict strongly if the crypto price would move up or down.
So, if you are planning to make a profit with Bitcoin price moving up, you might need to consider opening a long position. Here is an example that demonstrates how a long position in crypto margin trading works –
How Long position in crypto margin trading works?
Say, as a trader you wish to procure Bitcoin worth of $600 and based on your prediction you have come to conclusion that Bitcoin price would move upwards.
So, with 1:2 leverage you borrow $300 and buy Bitcoin worth of $600 when price moves up say $900 the profit you earned would be $300 [ 900-300[account balance]-300[borrowed money]], i.e. excluding fees/interest.
This is known as a Long position in crypto margin trading.
Now, if you are planning to make a profit with Bitcoin price moving down, you might need to consider opening a short position. Here is an example that demonstrates how a short position in crypto margin trading works –
How Short position in crypto margin trading works?
The current price of Bitcoin is $400 and again as per your smart analysis you come to a conclusion that prices would be dipped further, then you can earn a profit by selling the borrowed cryptos and repurchasing them later at a lower price.
The exact opposite of a buy position and even the profit/loss is reversed.
So if you opened a 2x short position with $100, if it went down 50% you’d earn $100; if it went up 50%, you’d have lost $100, and the exchange would close your position.
Hope this narration helps you in understanding Margin Trading better. Happy Trading.